february 23, 2012 - psers€¦ · mendations for the 2012/13 fiscal year. in addition, psers...

February23,2012

MembersoftheSenateAppropriationsCommittee

DearMembers:

OnbehalfofthePublicSchoolEmployees’RetirementSystem(PSERS),Iampleasedtopresenttheaccom-panyingreportonthefinancial,actuarial,andinvestmentoperationsofPSERSandthebudgetaryrecom-mendationsforthe2012/13fiscalyear.Inaddition,PSERSComprehensiveAnnualFinancialReportforthefiscalyearendedJune30,2011(FY2010/11)isalsoattached.

PSERSisresponsibleforadministeringadefinedbenefitpensionplanforover588,000active,retired,inac-tiveandvestedpublicschoolemployeesintheCommonwealthofPennsylvania.PSERSalsoadministerstwopostemploymenthealthcareprograms,thePremiumAssistanceProgramandtheHealthOptionsPro-gram(HOP)foritsannuitants.Somehighlightsofrecentactivitiesfollow:

Financial Highlights

• ForthefiscalyearendedJune30,2011PSERS’investmentportfoliogeneratedarateofreturnof20.37%.Inthefollowingsixmonths,themarketsremainedvolatilewhileEuropeansovereigndebtissuesescalatedandtheU.S.continueditsslowrecoveryfromtherecession.Asaresult,PSERSestimatesitsoneyearreturnfortheyearendedDecember31,2011at4.32%.

• IncomefromtheinvestmentportfoliorepresentsthemajorsourceofrevenuetoPSERS,accountingfornearly69%oftotalrevenuesovertheten-yearperiodfromFY2001/02toFY2010/11.PSERS’totalplannetassetsincreasedby$5.6billionfrom$45.8billionatJune30,2010to$51.4billionatJune30,2011.PSERStotalplannetassetsasofDecember31,2011were$47.9billion.

• TheBoardcontinuedtofulfillitsmissiontomaintainthestabilityandlong-termoptimumvalueoftheFund.OfutmostimportancetotheBoardistheassurancethattherequiredreservesareavailableforpaymentofretirementbenefits.PSERSBoarddecreasedtheinvestmentrateofreturnassump-tionfurtherfrom8.0%to7.5%effectiveasoftheJune30,2011actuarialvaluation.TheBoarddecreasedtherateofreturnassumptiontoprovideamorerealisticoutlookonthefutureearningspotentialoftheFundaslong-termcapitalmarketassumptionshavedeclined.ThedecreaseintheassumptionallowedPSERStomodifyitsassetallocationplanduringFY2010/11toachieveitsnewreturntargetwithloweroverallrisk.Theestimatedannualizedrateofreturnforthetwenty-fiveyearperiodendedDecember31,2011was8.58%andexceededtheFund’slong-terminvestmentrateofreturnassumptionduringthattimeperiod.

SenateAppropriationsCommitteeFebruary23,2012Page2

• PSERSbenefitsfrommanagingalmost1/3ofitsassetsinternallyincludingoperatingitsownequitytradingroom.During2011,PSERScontinuedtobringmoreinvestmentsin-housetobemanagedbyPSERS’internalInvestmentProfessionalstaff.InFY2010/11PSERSsavedapproximately$10.4millioninmanagementfeesbyutilizingPSERSin-houseportfolioman-agers.Thein-houseinvestmentprofessionalsalsooutperformedtheirbenchmarksandadded$48.0millioninadditionalinvestmentincometotheFund.Therefore,PSERSinvestmentstaffsavedtheFundatotalof$58.4million.

• Totalmembercontributionsincreasedfrom$1.14billioninFY2009/10to$1.24billioninFY2010/11asaresultofaslightincreaseintheaveragemembercontributionrateandanincreaseintheactivememberpayroll.

• Totalemployercontributionsincreasedfrom$638.0millioninFY2009/10to$747.8millioninFY2010/11duetoanincreaseintheemployercontributionratefrom4.78%inFY2009/10to5.64%inFY2010/11andanincreaseintheactivememberpayroll.Thecurrentemployercontributionrateis8.65%andwillincreaseto12.36%forFY2012/13.

• PSERStotaladministrativebudgetrequestrecommendedbytheGovernoris$44.1millionforFY2012/13andislevelcomparedtothe$44.1millionavailableforFY2011/12.PSERShasbeenabletomaintainoperationalefficiencieswhilethememberpopulationisincreasingasdiscussedfurtherunder“ContinuedImprovementinEfficiencyofOperations.”

Funded Status

• PSERSusesanactuarialreservetypeoffundingthatisfinancedbymembercontributions,employercontributions,andearningsfrominvestedassets.Anindependentactuarialvalu-ationofPSERS’actuarialassetsandliabilitiesisperformedannually.Aspartofthisvalua-tion,theprogresstowardfundingpensionobligationsofPSERSismeasuredbycomparingtheactuarialvalueofassetstotheactuarialaccruedliability.Thismeasurementisreferredtoasthefundedratioorfundedstatus.ThemostrecentactuarialvaluationreportsthatPSERSis69.1%fundedasofJune30,2011.ThisrepresentsadecreasefromPSERS’75.1%fundedstatusasofJune30,2010.

Investment and Pennsylvania Commitment

• PSERShasacontinuingcommitmenttoPennsylvaniacompaniesbycontractingwithPenn-sylvania-basedinvestmentadvisorcompaniesandbyinvestinginPennsylvania-basedcom-panieswhereinvestmentcharacteristics,includingyield,risk,andliquidity,areequivalent.DataonPennsylvaniainvestmentsiscontainedintheaccompanyingreport.

• PSERS’totalbenefitexpenseincreasedby$300millionfrom$5.3billioninFY2009/10to$5.6billioninFY2010/11.Thisincreaseisattributabletothenumberofnewretirementsfortheyear,higherlumpsumpaymentsaswellasanongoingincreasetotheaveragemonthlybenefit.

• Since91%wasdistributedtoCommonwealthresidents,asubstantialportionofPSERS’es-timated$5.6billionannualpayrollremainsinPennsylvania,thusbenefitingtheeconomyoftheCommonwealth.


Implementation of Act 120 of 2010

• OverthepastyearPSERSbegantophaseintheimplementationofAct120of2010.Act120of2010providedhistoricpensionreformandmadedramaticprogresstowardaddressingfundingissuesatPSERS.ThelegislationincludedactuarialandfundingchangestoPSERSandbenefitreductionsforindividualswhobecomenewmembersofPSERSonorafterJuly1,2011.

• IfAct120wasnotinplacetheemployercontributionratewouldhavespikedto29.65%inFY2012/13.Thatisanapproximately$2.5billiondollardifferencebetweenthe29.65%pre-Act120employerrateandthe12.36%employerratethatwillgointoeffectJuly1,2012.ThisbudgetarydeferralofcontributionswillsignificantlybenefittheCommonwealthandschooldistrictsinFY2012/13.

• Act120graduallyincreasescontributionstoPSERSinamorebudgetaryfeasiblemannerforboththeCommonwealthandschoolemployersthanunderpreviouslaw.Overthenextfiveyears,Act120willresultinadeferralof$8.9billionofemployercontributions.DespitethebudgetarydeferralsprovidedbyAct120,thefutureemployercontributionsrequiredaresig-nificantasshowninthesupportingbudgetmaterial.Theprocessnowbecomesanappropria-tionchallengetomeetthegradualfundingincreasesprovidedforinAct120.TheGovernor’sBudgetfullyfundstheCommonwealth’sportionoftheemployercontributionrateof12.36%forFY2012/13incompliancewithAct120.

• TheprojectedemployernormalcostofAct120membersisapproximately3%ofpayrollwhichis68%lessthanthenormalcostforpre-Act120members.The“employernormalcost”istheamountneededfromtheschoolemployerstofundthebenefitsearnedbytheac-tivemembersforthatyear.Basedonthe2010ComparativeStudyofMajorPublicEmploy-eeRetirementSystemspreparedbytheWisconsinLegislativeCouncil,PSERS’projectedemployernormalcostrateof3%isoneofthelowestamongmajorU.S.publicretirementsystems.

Continued Improvement in Efficiency of Operations

• PSERS’effortstoincreaseefficiencyhavecontinuedtopositivelyimpactPSERS’operations.Duringcalendaryear2011,PSERSsawanincreaseofapproximately34%inretirementspro-cessed(13,206in2011and9,863in2010).In2011,84.77%oftheretirementapplicationsprocessedwerefinalizedinone-stepascomparedto69.68%in2010.Historically,PSERShadpaidretirementbenefitsintwosteps:areducedinitialbenefitwithinabout10weeksofretirementbasedoninformationonfilewithPSERSatthattimeandthenafinalbenefitwithretroactivemonieswithinabout18monthsoftheretirementdateusingfinalinformation.Theone-stepbenefitsarebeingpaidinanaverageoflessthanfourweeksafterallthenecessaryinformationisreceived.


• Thedirectresultoftheseimprovedefficienciesisareductioninduplicatedworkthatenablesstafftofocusonothercustomerserviceareasandprocesshighervolumeswithoutincreasingstaffsize.PSERSstaffcounseled2,073additionalmembersforanincreaseof23%overthepreviousfiscalyear(from8,905inFY2009/10to10,978inFY2010/11).

• Effortstopreventandreducebacklogshavealsocontinued.In2009,thereweremorethan25,000PurchaseofService(POS)applicationstoprocess.Attheendofcalendaryear2011,therewereapproximately5,000applicationsremainingtobeprocessed.Thisreductionoc-curreddespite10,732newPOSapplicationsbeingreceived.

• Theadministrativecostformembers(active,annuitant,andbeneficiaries)hasdecreasedfrom$95.73inFY2003/04toanestimated$75.87inFY2012/13primarilyduetoefficienciesgainedfromtheimplementationofthenewpensionadministrationsystem,theincreaseduseofone-stepprocessingaspreviouslydescribed,limitedtravelandincreaseduseofelectroniccommunicationswithmembersandstakeholders.

Inconclusion,pleasecontactJeffreyB.Clay,PSERSExecutiveDirector,ifyouhaveanyquestionsorwouldlikeadditionalinformation.

Respectfully,

MelvaS.Vogler ChairmanoftheBoard

PennsylvaniaPublic School Employees’

Retirement System

(A Component Unit of the Commonwealth of Pennsylvania)

PO Box 125Harrisburg, Pennsylvania 17108-0125

FY2012/13 Budget ReportSenate Appropriations Committee

February 23, 2012

Melva S. VoglerChairman

Board of Trustees

Sally J. TurleyVice Chairman

Board of Trustees

Jeffrey B. ClayExecutive Director

Report prepared by the Public School Employees’ Retirement System staff

2012/13 Budget Hearing MaterialsTable of Contents

Section 1 – PSERS Overview

Overview and Mission Statement ........................................................................................................................ Tab 1

PSERS Board of Trustees ..................................................................................................................................... Tab 2

PSERS Organizational Chart and Description .................................................................................................. Tab 3

Member Demographics ........................................................................................................................................ Tab 4

Actuarial Process and Pension Plan Funding ..................................................................................................... Tab 5

Employer Contribution Rates: Past, Present and Future ................................................................................ Tab 6

Consultants’ Fees................................................................................................................................................... Tab 7

Legislation Information ........................................................................................................................................ Tab 8

Section 2 – Budget FY2012/13

PSERS FY2012/13 Budget .................................................................................................................................. Tab 9

Directed Commissions Recapture Program Budget .......................................................................................... Tab 10

Section 3 – Investment Information

Investment Policy, Objectives, and Performance ................................................................................................Tab 11

Asset Allocation ..................................................................................................................................................... Tab 12

Investment Program Summary ........................................................................................................................... Tab 13

Investment Advisory Fees ..................................................................................................................................... Tab 14

Internal Equity Trading Desk .............................................................................................................................. Tab 15

Public Market Emerging Investment Manager Program ................................................................................. Tab 16

Section 4 – Commitment to Pennsylvania

Pennsylvania-Based Investment Managers ........................................................................................................ Tab 17

Investments in Pennsylvania ................................................................................................................................ Tab 18

Section 5 – Other PSERS Programs

Health Options Program ...................................................................................................................................... Tab 19

Premium Assistance Program .............................................................................................................................. Tab 20

Comprehensive Annual Financial Report ......................................................................... See separate document

Section 1 - PSERS Overview

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Page 3Page 3


Overview

Established on July 18, 1917, with operations commencing in 1919, the Pennsylvania Public School

Employees’ Retirement System (PSERS or System) provides retirement benefits to public school employees of the Commonwealth of Pennsylvania.

As of June 30, 2011, the System had approximately 279,000 active members. The annuitant membership was comprised of approximately 195,000 retirees and beneficiaries who received average monthly pension benefit payments of over $394 million including healthcare premium assistance. The average yearly pension benefit paid to annuitants was $23,897. PSERS had 756 participating employers on June 30, 2011.

As reported in the latest Pension and Investments survey published February 6, 2012, PSERS is the 27th largest plan among United States corporate and public pension plans, and the 17th largest state-sponsored defined benefit public pension fund in the nation. PSERS’ total plan net assets as of December 31, 2011 were approximately $47.9 billion.

During the 2011 fiscal year the overall gross distribution of pension and postemployment healthcare benefits including monthly benefits, direct rollovers, survivor benefits and refunds totaled $5.6 billion. Of this amount, 91% was distributed to Pennsylvania residents representing PSERS’ significant impact on the Commonwealth’s economy.

Mission Statement

The Board of Trustees and the employees of the Public School Employees’ Retirement System serve

the members and stakeholders of the System by:

• Providing timely and accurate payment of benefits,

• Maintaining a financially sound System,

• Prudently investing the assets of the System,

• Clearly communicating members’ and employers’ rights and responsibilities, and

• Effectively managing the resources of the System.


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Page 5

PSERS Board of Trustees

Melva S. Vogler, Chairman

Sally J. Turley, Vice Chairman

Honorable Patrick M. BrowneSenate of Pennsylvania

Glen S. Galante

Thomas J. Gentzel

Honorable Glen R. GrellHouse of Representatives

Honorable Lawrence M. FarneseSenate of Pennsylvania

Honorable Joseph F. MarkosekHouse of Representatives

Honorable Robert M. McCord Treasurer of Pennsylvania

Hal Moss

Richard N. Rose

James M. Sando

Ronald J. Tomalis Secretary of Education

Patricia A. Tozer

Governor’s Appointee (Vacant)

PSERS Board Members as of January 3, 2012


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Organizational Structure of thePublic School Employees’ Retirement

System

Executive Office

This office is responsible for the overall management of the Public School Employees’ Retirement System

(PSERS) to achieve the primary objectives of the Fund as established by the Board of Trustees (Board). Reporting directly to the Executive Director are the Deputy Executive Director, Assistant Executive Director, Chief Investment Officer, Chief Financial Officer, Internal Auditor, Press Secretary, and Legislative Liaison. The Executive Director serves as chief executive officer responsible for the establishment, installation, and maintenance of modern management techniques to provide an efficient control of funds for and services to the active members and annuitants of the System.

The Executive Office monitors the operation of the investment portfolio and evaluates portfolio performance for consideration by the Board, certifies expenditures of the Fund, and measures performance of professional individuals or firms with whom the Board contracts for specialized services. The Executive Office also apprises the Board of any development that will in any way affect the System and its operation.

Investment OfficeThis office is responsible for the investment activities of the System. In compliance with the investment policy established by the Board, PSERS’ investment assets are allocated to numerous outside professional investment advisors and internal investment professionals.

Chief Counsel's OfficeThis office provides legal services through a team of professional personnel under the Governor's Office of General Counsel. The Legal staff is responsible for representing PSERS in all administrative hearings and other litigation matters; drafting and negotiating PSERS' investment and administrative services contracts; and providing counsel on a wide variety of matters, including the interpretation of the Retirement Code and the Right-to-Know Law.

Internal Auditor's OfficeThis office performs systematic reviews of the various PSERS activities, testing for compliance with applicable laws, policies and procedures. The Internal Auditor makes recommendations on the improvement of PSERS' internal control system.

Office of Financial ManagementThis office is directed by the Chief Financial Officer and has responsibility for planning, organizing and directing a complete accounting and financial reporting system in conformance with accounting principles generally accepted in the United States of America. Oversight is provided for new accounting systems development and maintenance of existing systems, and ensuring appropriate accounting controls. The office is the liaison for other state and federal agencies, reporting units, financial consultants, actuaries, and investment advisors for all accounting, treasury operations, taxation, actuarial and budgetary matters. The office is organized into three divisions: General Accounting Division, Annuitant Accounting and Budget Division, and Investment Accounting Division. Deputy Executive DirectorThe Deputy Executive Director directly oversees the benefit programs for all active and retired members of the System, the development and implementation of the member and employer communications programs and the member counseling programs, and the maintenance of agency policies, procedures, and benefit related data. Additionally, this position supervises a Chief Technology Officer who oversees business and information technology strategic planning, policy development, and implementation. The organizational units directly reporting to this position include the Bureau of Benefits Administration, the Bureau of Communications and Counseling, and the Bureau of Information Management. The position oversees the Bureau of Information Technology through the Chief Technology Officer.

Information Technology OfficeThis office oversees the Bureau of Information Technology and the Business Architecture Center. It is responsible for strategic information technology planning and policy development, ensuring that information technology plans and policies are aligned with, in support of, and prioritized according to agency needs and requirements, as well as those Commonwealth needs and requirements that are consistent with agency needs, and for communicating such to the agency’s information technology staff. Large information technology contracts and projects are managed by this office. This office is responsible for understanding, analyzing, documenting, and improving PSERS’ organization, business rules, processes, information systems, and the relationships among these components so that PSERS is able to: conduct its business consistently and according to established rules; understand each component, its relationship to each of the other components and to PSERS’ mission, vision, values and goals; fully, yet quickly analyze and understand the impact of potential change to one or more of these components on the others; more effectively identify inefficient, duplicate, or suspect processes, and/or technologies; and account for its organizational business rules and processes, information systems and technologies.


Page 9

Bureau of Information TechnologyThis bureau is responsible for planning, coordinating, administering, and implementing information technology resources in accordance with the agency’s strategic plans, goals, objectives, and priorities as communicated by PSERS’ Chief Technology Officer, and for providing operational support for those technologies and initiatives. The bureau is organized into three divisions: the Network, Server, and Database Division, the Business Applications Division, and the Document Archive and Data Capture Division.

Bureau of Information ManagementThis bureau is responsible for maintaining, documenting, and cleansing PSERS’ member and employer data, managing PSERS’ electronic data records, imaged records, paper and film/fiche records, understanding the meaning and knowing the location of its data. The bureau currently includes the Data Stewardship Division which houses PSERS’ records management program, and the Data Integrity and Member Accounting section.

Bureau of Benefits Administration This bureau is responsible for administering a comprehensive pension benefits program for PSERS. The bureau provides professional and technical services to individuals who are employed full-time and part-time in one of Pennsylvania’s 756 public schools or institutions. They also provide services to retirees, their beneficiaries and persons legally authorized to act on their behalf. The bureau is organized into three divisions: the Benefit Processing Division, Benefit Policy and Specialized Service Division, and Exception Processing Division.

Bureau of Communications and CounselingThis bureau is responsible for professionally communi-cating accurate and timely information. The goal is to promote the understanding of PSERS' benefits and processes to the members, the employers, the Legislature, the Governor’s Office, other government organizations, professional organizations, and the public. It is organized into two divisions: the Field Services Division and the Communications Services Division.

Assistant Executive DirectorThis position reports to the Executive Director and provides assistance to the Executive Director on agency-wide projects. The position administers the Health Options and Premium Assistance Programs in addition to the facilities, human resources, and procurement activities necessary to support, secure and optimize agency operations. Organizational units overseen by the Assistant Executive Director include the Bureau of Administration, the Human Resources Office, and the Health Insurance Office.

Bureau of Administration This bureau is responsible for facilities, purchasing and contracting, documenting administrative policies and procedures, business continuity, automotive, mail, imaging, printing and other administrative services necessary to support agency functions. The bureau is organized into three divisions: the Purchasing and Contracting Division, the Administrative Services Division and the Security and Business Continuity Division.

Human Resources OfficeThis office is responsible for supporting management and staff to facilitate the accomplishment of the agency’s mission. It administers all human resources programs and ensures compliance with labor law and Commonwealth regulations. Programs include position classification, labor relations, recruitment and placement, employee benefits, employee compensation and pay, training and staff development, time and attendance, performance management, organizational development and support, employee transactions, Equal Employment Opportunities and other miscellaneous programs.

Health Insurance OfficeThis office is responsible for all aspects of the PSERS’ Health Options Program (HOP) and administering PSERS’ health insurance Premium Assistance benefits. The HOP is a voluntary program that provides group health insurance coverage for 74,000 (at January 1, 2012) school retirees, their spouses, and eligible dependents.

Organizational Structure (continued)

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Organizational Structure (continued)

PSERS’ Regional OfficesThere are eight PSERS Regional Offices strategically locat-ed throughout the Commonwealth. These offices provide services to both active and retired PSERS members and 756 employers. Among these services are regularly scheduled retirement counseling meetings and other informational presentations on various topics relating to retirement ben-efits and programs. See map on next page.

Services provided to PSERS’ Members(by the Bureau of Benefits Administration)

Calendar Year 2009 2010 2011

Purchase of Service Applications Processed 16,404 22,243 16,540

Retirements Processed • Normal and Early 11,053 9,863 13,206• Disability 458 442 523

Services provided to PSERS’ Members(by the Bureau of Communications and Counseling)

FY2008/09 FY2009/10 FY2010/11

Number of General Information Programs 197 209 206Number of Members Attended 10,850 12,372 13,625

Number of Exit Counseling (small group) Sessions 908 909 1,084Number of Members Attended 6,438 7,466 9,653

Individual Counseling Sessions 1,918 1,439 1,325

Telephone Calls Answered 229,773 233,452 243,024Telephone Calls Out 54,628 55,200 56,576

E-Mail In 31,008 33,298 60,527E-Mail Out 30,860 32,538 54,098


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Page 13

PSERS’ Member Demographics

Age and Service Profile of Active Members June 30, 2010 June 30, 2011

Average Age 44.5 years 44.5 yearsAverage Years of PSERS Service 10.5 years 10.4 yearsAverage Annual Compensation $45,344 $46,247

Profile of PSERS’ Annuitants, Beneficiaries, and Survivor Annuitants

Type of Member Number of Members Average Annual Benefit6/30/2010 6/30/2011 6/30/2010 6/30/2011

Normal/Early Retirees 168,238 175,636 $24,442 $25,094Survivor Annuitants 8,724 10,957 $10,467 $9,547Disability Retirees 7,972 8,029 $17,091 $17,294Total 184,934 194,622 $23,466 $23,897

Members by Type

Fiscal Year ending June 30

Active Members

Inactive Members

Annuitants, Beneficiaries, and Survivor Annuitants

Total Active/Retired

Members

Ratio of Active/Retired

Total Inactive, Active & Survivor

Annuitants2011 279,152 115,102 194,622 473,774 1.43 to 1 588,8762010 282,041 111,931 184,934 466,975 1.53 578,9062009 279,701 103,805 177,963 457,664 1.57 561,4692008 272,690 100,803 173,540 446,230 1.57 547,0332007 264,023 109,186 168,026 432,049 1.57 541,2352006 263,350 94,071 161,813 425,163 1.62 519,2342005 255,465 58,720 156,519 411,984 1.63 470,7042004 247,901 72,014 151,552 399,453 1.63 471,4672003 246,700 65,453 145,693 392,393 1.69 457,8462002 242,616 61,295 141,414 384,030 1.71 445,325


Page 14

PSERS’ Member Demographics (continued)

PSERS Pension Plan Changes in Net Assets *10 Year Cumulative Summary

(Dollar Amounts in Thousands)

Cumulative 10 Year TotalJuly 1, 2001-June 30, 2011

Balance of Net Assets (07/01/01) $ 48,096,955 Member Contributions $ 8,455,111 Employer Contributions 4,353,703 Net Investment Income 30,818,944 Total Deductions - Benefits & Expenses (40,524,719)Net Increase $ 3,103,039Balance of Net Assets (06/30/11) $ 51,199,994

*Does not include PSERS Postemployment Healthcare Plan Net Assets.

$5.3

$5.0

$4.7

$4.7

$4.1

$3.9

$3.7

$3.3

$3.0

$2.8

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Deductions from Pension Plan Net Assets *10 Year Trend (Fiscal Year ended June 30)

(Dollar Amounts in Billions)

Monthly Benefits Lump Sum and Installment Refunds/Administrative/Net Transfers

$-4.6

$-1.1

$6.0

$3.6

$5.3

$10.1

$-4.8

$-19.5

$2.6

$5.6

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Net Increase/Decrease to Pension Plan Net Assets *10 Year Trend (Fiscal Year Ended June 30)

(Dollar Amounts in Billions)


Page 15

The Actuarial Process and Pension Plan Funding

PSERS is a defined benefit plan, meaning benefits are based on members’ service and salary history. The

following information highlights the actuarial process and funding for PSERS.

Actuarial ProcessThe actuarial process presumes that there will be a systematic flow of contributions at a specified level to pay for plan benefits and that the flow of contributions, together with investment earnings, will be sufficient to meet all benefit and expense requirements of the plan. Actuarial cost methods for funding PSERS pension plan are defined in the Public School Employees’ Retirement Code. The actuary for the pension plan reviews economic and demographic experience annually and over five-year periods. The actuary’s periodic valuations test the validity of the underlying actuarial assumptions versus the actual experience of the plan. That experience is also used as a basis for formulating actuarial assumptions, which are essentially highly educated predictions about what will occur in the future with respect to salary growth, investment returns, and demographic factors such as rates of retirement and death.

Effective with the June 30, 2011 actuarial valuation, PSERS adopted several new demographic and economic assumptions as a result of the Five-year Experience Study completed by PSERS’ actuary. PSERS’ investment rate of return assumption was changed from 8.00% to 7.50%, the Salary Growth Assumption was changed from 6.00% to 5.50%, and new mortality tables were adopted.

FundingThe plan is funded through three sources: (1) employer

contributions; (2) member contributions; and, (3) investment earnings. As depicted in the chart at the bottom of the page, for the ten-year period ended June 30, 2011 investment earnings provided 69% of PSERS’ funding followed by 19% from members. Employers contributed 12%, the smallest of the three sources.

Employer ContributionsThe Retirement Code vests the Board with the authority to establish the employer contribution rate (ECR). The Board, in consultation with the actuary, establishes the employer contribution rate annually, as part of the annual actuarial valuation. The employer contribution rate, which is expressed as a percentage of payroll, is composed of two items: (1) the pension contribution; and, (2) the contribution for health care premium assistance.

The total employer contribution rate for the fiscal year ended June 30, 2011 was 5.64%, including 0.64% for healthcare premium assistance. The total employer contribution rate for the year ending June 30, 2012 is 8.65%. This rate consists of an 8.00% pension rate (FY2010/11 rate of 5.00% plus the Act 120 3.00% collar) plus the healthcare premium assistance contribution of 0.65%. The FY2012/13 employer contribution rate is 12.36%. This rate consists of an 11.50% pension rate (FY2011/12 rate of 8.00% plus the Act 120 3.50% collar) plus the healthcare premium assistance contribution of 0.86%. The Board of Trustees certified this rate that was calculated in accordance with the provisions of Act 120 of 2010 at their December 2011 meeting.

For the fiscal year ended June 30, 2011, PSERS’ employer contributions totaled $748 million, which includes $89 million for healthcare premium assistance. For the fiscal year ending June 30, 2012 the employer contribution estimate is $1.221 billion, reflective of the 8.65% contribution rate. The contribution rate for the fiscal year ending June 30, 2013 is 12.36% which results in an employer contribution estimate of $1.767 billion.

Member ContributionsMembers of the Public School Employees’ Retirement System who, prior to Act 9 of 2001, contributed to the Retirement Fund at the rate of 6.25% of their gross compensation, began contributing 7.50% in January of 2002, if they elected the higher retirement benefits. Members who contributed at the rate of 5.25% began contributing 6.50% if they elected the higher retirement benefits. The average contribution rate payable by the members for the current year (FY2011/12) is 7.37%.

In accordance with Act 120 of 2010, any employee who becomes a member after June 30, 2011 is a Class T-E member or, alternatively, can elect to become a Class T-F member. The base contribution rate for Class T-E members is 7.50% of compensation. The base contribution rate for

InvestmentEarnings

69%$30.8 Billion

MemberContributions

19%$8.5 Billion

EmployerContributions

12%$5.2 Billion

PSERS Sources of FundingTen Year History (2002 to 2011)


Page 16


(continued)Class T-F members is 10.30% of compensation. Class T-E and Class T-F members are subject to a “shared risk” employee contribution rate. The member contribution rate will stay within the specified range alloted for Class T-E or Class T-F, but could increase or decrease every three years starting July 1, 2015 depending on investment performance.

PSERS members contributed $1.043 billion for pension contributions for FY2011, compared to $952 million for FY2010. Total member contributions are estimated to be $1.040 billion for the year ending June 30, 2012 and $1.058 billion for the fiscal year ending June 30, 2013. The annual member contributions are projected to remain flat in FY2011/12 due to the high level of purchase of service member contributions recorded in FY2010/11.

Investment ReturnsThe investment rate of return (net of fees) for the fiscal years ended June 30, 2011 and June 30, 2010 was 20.37% and 14.59%, respectively. The annualized rates of investment return for the three, five and ten-year periods ended June 30, 2011 were 0.44%, 3.89% and 6.25% respectively. The estimated investment rates of return for the one, three, five and ten-year periods ended December 31, 2011 were 4.32%, 10.12%, 1.34% and 6.29%, respectively. Over the past 25 years ended December 31, 2011 the Fund earned an estimated annualized rate of return of 8.58% which exceeded the Fund’s long term investment rate of return assumption during that time period.

Funded StatusPSERS funded status is measured by comparing the actuarial value of assets with the accrued liability. The accrued liability is the present value of benefits accumulated to date for both active and retired members.

Key Facts

• Funded Status: 69.1% as of June 30, 2011

• Funded Status: 75.1% as of June 30, 2010

• The decrease in FY2011 is primarily due to the actuarial value of assets loss that occurred during the year as a result of the 10 year asset smoothing used for actuarial valuation purposes and the adoption of new demographic and economic assumptions used to value the System’s liability. There was also a net actuarial experience gain.

• The decrease in the funded status since 2000 is the result of several factors including: the unfavorable investment markets from FY2001 to FY2003 and FY2008 to FY2009; funding changes enacted in Act 38 of 2002 and Act 40 of 2003; the adoption of new demographic and economics assumptions in FY2008, FY2009 and FY2011 and actuarial liability losses.

• A thirty-year history of PSERS’ funded status is shown below.

49.30%

66.50%

123.80%

66.30% est.

0%

50%

100%

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2012 est.

Thirty Year History of PSERS Funded Ratio Funded Ratio = Actuarial Value of Assets/Actuarial Accrued Liabilities

Fiscal Year Ending June 30

FY1989/90 ECR = 19.68% FY2012/13 ECR = 12.36%


Page 17


(continued)GASB Pension Accounting and Financial Reporting Project (Pension Project)In 2006, GASB began a multi-year project to re-examine the current pension accounting standards as detailed in GASB Statements 25 and 27. In March 2009, GASB issued an Invitation to Comment (ITC) on possible changes to the pension accounting standards. The ITC discussed two al-ternative approaches that the standards might follow. The first approach was similar to the current standards and the second was based on a market value approach similar to private sector pension accounting.

On June 16, 2010, GASB issued its Preliminary Views (PV) on proposed changes to accounting and financial re-porting standards for state and local government employers that sponsor defined benefit pension plans. The PV was an intermediate step in the GASB Pension Project and reflects GASB’s expectation of significant discussion related to the proposed changes. In the PV, GASB proposed a middle ap-proach which combines elements of the two alternatives described in the ITC.

The proposed standards in the PV would have a significant impact on pension accounting and financial reporting by employers and would separate the accounting standards from the standards used to determine funding requirements. PSERS provided comments to GASB on the PV in Septem-ber 2010 and has collaborated with constituent groups that have also provided comments to GASB.

After considering the comments they received from the PV, GASB issued two Exposure Drafts (ED) to further refine the Pension Project. The first ED entitled Financial Re-porting for Pension Plans an amendment of GASB State-ment No. 25, would amend the financial reporting by state and local governmental pension plans. The second ED en-titled Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27, would amend the financial reporting by state and local governments whose employees are provided with pensions. In October 2011, PSERS provided comments to GASB with regard to both EDs individually and collectively with constituent groups and completed participation in GASB’s field test of the EDs.Once GASB reviews the input received in response to the EDs and field tests, it will issue the new accounting stan-dards that could be effective in 2013. PSERS will continue to monitor the GASB Pension Project very closely to gauge the future impact on its financial governance.



Page 18



Page 19

Employer Contribution Rate

PSERS undergoes an annual independent actuarial valuation to calculate the actuarial assets and liabilities

of the pension fund. Based on the actuarial valuation process, the actuary develops the recommended Employer Contribution Rate (ECR) that determines the employer contributions to the pension plan and healthcare premium assistance. The valuation process also measures the progress of the pension system towards funding pensions for its active and retired members.

Employer Contribution Rate Statistics• Highest historical ECR (FY1985/86) 20.04%• Lowest historical ECR (FY2001/02) 1.09%• Ten yr. avg. ECR (2002/03 to 2011/12) 5.13%• Twenty yr. avg. ECR (1992/93 to 2011/12) 6.72%• Thirty yr. avg. ECR (1982/83 to 2011/12) 10.65%• Adopted ECR (FY2012/13) 12.36%

PSERS’ average member rate, employer contribution rate and normal cost for thirty years is presented in the graph on the bottom of the page.

Act 120 of 2010Progress on Funding Issue Over the past year, PSERS began to phase in the implementation of Act 120 of 2010. Act 120 of 2010 provided historic pension reform and made dramatic progress toward addressing funding issues at PSERS. The legislation included actuarial and funding changes to PSERS and benefit reductions for individuals who become

new members of PSERS on or after July 1, 2011.

Impact of Benefit Cuts for New Members on or after July 1, 2011 For school employees who become new members of PSERS on or after July 1, 2011, there are two new classes; Class T-E and T-F. All new members will automatically become Class T-E members. New members however, will have a one-time opportunity to elect Class T-F within 45 days of receiving written notification from PSERS. Failure to elect Class T-F at time of original eligibility will make the member ineligible for Class T-F forever. In other words, once the election is made either by action or inaction, the election is permanent.

Class T-E• Pension multiplier is 2%• Effective July 1, 2011 employee contribution base rate

is 7.5% (base rate) with “shared risk” contribution levels between 7.5% and 9.5%

Class T-F• Pension multiplier is 2.5%• Effective July 1, 2011 employee contribution base rate

is 10.3% (base rate) with “shared risk” contribution levels between 10.3% and 12.3%

As of December 31, 2011, 471 or 18% of new members elected class T-F and 2,140 or 82% of new members remained in class T-E. As indicated above, Class T-F members maintain the higher 2.5% pension multiplier but contribute at a higher member contribution rate than Class T-E members.

13.31% (1980)

20.04% (1985)

14.90% (1992)

4.61% (2000)

1.09% (2002)

8.65% (2012)

12.36% (2013)

0

5

10

15

20

25

1980 1985 1990 1995 2000 2005 2010

Perce

nt

PSERS' Contribution Rates as a Percent of PayrollFiscal Year Ending June 30

Average Member Rate Employer Contribution Rate Employer Normal Cost Rate (incl. Premium Assistance)


Page 20

Employer Contribution Rate (continued)

Funding/Actuarial Changes Summary

Funding Changes - Employer ContributionsThe legislation also suppresses the employer contribution rate by using rate caps in future years to keep the rate from rising too high, too fast for budgetary purposes.

The rate caps limit the amount the pension component of the employer contribution rate can increase over the prior year’s rate as follows:

• FY2011/12 - not more than 3.0% plus the premium assistance contribution rate



• Thereafter - not more than 4.5%

The rate cap remains at 4.5% until the rate cap no longer applies, i.e. the rise in the employer contribution rate is less than the rate cap in effect at that time.

After that, the rate is what is calculated by PSERS actuary and approved by the PSERS Board, subject to a new rate floor or minimum employer contribution rate that will be the employer normal cost (currently about 8%), plus the premium assistance contribution rate. The “employer normal cost” is the amount needed from the school employers to fund the benefits earned by the active members for that year.

Act 120 Costs and SavingsAs depicted by the chart on the following page, Act 120 has a projected net savings of $1.38 billion over 30 years. Act 120 benefit reductions are projected to save $24.65 billion through FY2043/44. The cost savings from benefit reductions are offset by Act 120 funding and actuarial changes. Those changes defer contributions for budgetary purposes and are projected to cost $23.27 billion through FY2043/44.



Page 21


{

Costs$23.27

10 Year Asset Smoothing $7.13

10 Year Vesting $2.27

Net Savings $1.38

Savings $24.65

Change Amortization Method $8.75

to level percent of pay $19.21re-amortization of unfundedaccrued liabilities to 24 years $(10.46)

Pension Multiplier Change to 2% $12.65

Eliminate Option 4 Withdrawal of Employee Contributions & Interest $5.87

Changes in Superannuation $3.86 Funding Collars

$7.39

Act 120 of 2010Costs and Savings Compared to Prior Law

Projected to FY 2043/2044($ in billions)


Page 22


The chart at the top of the page shows PSERS’ projections of total employer contribution rate under Act 120 compared to previous law (Pre-Act 120). As depicted in the chart, Act 120 smooths the rate spike under previous law over five to nine years. The rate spike under previous law was budgetarily prohibitive for the Commonwealth and school employers. Although the contribution levels are still significant, Act 120 gives the Commonwealth and school employers five to nine years to gradually absorb the

necessary funding increases required to adequately fund PSERS.

The chart at the bottom of the page shows PSERS’ funded ratio projections under Act 120 compared to previous law. Due to the collars under Act 120, PSERS’ funded ratio is projected to drop below 60% by 2018 before starting to rise again.

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2012 2017 2022 2027 2032 2037 2042

PSERS Projection of Funded RatioPre-Act 120 vs. Post-Act 120

Post-Act 120 Pre-Act 120

0%

5%

10%

15%

20%

25%

30%

35%

40%

2012 2017 2022 2027 2032 2037 2042

PSERS Projection of Total Employer Contribution RatePre-Act 120 vs. Post-Act 120

(As Percentage of Payroll)

Post-Act 120 Pre-Act 120


Page 23

Employer Contribution Rate(continued)

Act 120 Employer CostsThe cost structure of PSERS’ new members under Act 120 is low and the shared risk provisions shift a portion of the investment risk to active members. The chart at the top of the page shows the components of the projected total employer contribution rate with unfunded liability, employer normal cost, and health care premium assistance. Essentially, Act 120 provides the members with a defined benefit plan, which is both adequate and secure, and provides the employers with a low cost employee pension benefit funded primarily by the members who have also assumed some of the investment risk. As the chart depicts, the employer normal cost decreases over time as Act 120 members replace retiring pre-Act 120 members. The projected employer normal cost of Act 120 members is

approximately 3% of payroll which is 68% less than the normal cost for pre-Act 120 members. This represents a significant cost reduction for the employers. Based on the 2010 Comparative Study of Major Public Employee Retirement Systems prepared by the Wisconsin Legislative Council, PSERS’ employer normal cost rate of 3% is one of the lowest among major U.S. public retirement systems.

Regardless of the benefit structure going forward, as depicted in the charts at the top and bottom of this page, the unfunded liability accumulated for service already rendered by active members is significant and represents a much larger cost to employers than the projected normal cost for existing and Act 120 members over the next 25 years.

0%

5%

10%

15%

20%

25%

30%

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044

Total Employer Cost as Percentage of Payroll

Fiscal Year Ended June 30

PSERS Components of Projected Total Employer Contribution Rate - Act 120Based on June 30, 2011 Actuarial Valuation - Assumes 7.5% Rate of Return

UnfundedLiability

Health Care

EmployerNormal

Unfunded Liability Rate

Employer Normal Cost

Rate Collars in effectFY 2012 to FY 2015

0%

5%

10%

15%

20%

25%

2012 2017 2022 2027 2032 2037 2042

Fiscal Year ended June 30

PSERS Projected Employer Contribution Rate - Assumes DB Plan is Frozen, no Future Benefits Offered Based on June 30, 2011 Actuarial Valuation - Assumes 7.5% Rate of Return

UnfundedLiability

Assumes PSERS Plan is frozenPrior debt still due

Rate Collars in effectFY 2012 to FY 2015


Page 24


Schedule of Employer Contributions

Year ended June 30

AnnualRequired

Contributions (ARC)

ActualEmployer

Contributions

ARCPercentage

Contributed

2011 $ 2,436,602 $ 646,560* 27%

2010 $ 1,928,278 $ 527,212* 27%

2009 $ 1,761,295 $ 503,227* 29%

2008 $ 1,852,238 $ 753,532 41%

2007 $ 1,708,821 $ 659,545 39%

2006 $ 1,328,373 $ 456,878 34%

* Net of purchase of service contributions.

Illinois, Connecticut and other states that have experienced bond ratings decreases as result of pension funding levels. As the table above shows, the Commonwealth and school employers have not made the required annual payments to PSERS for at least the past six years. Taxpayers, as a result, have benefited significantly for at least the past six years from pension payment deferrals. Pennsylvania must continue to increase its contributions to PSERS as provided in Act 120, or the problems currently facing New Jersey, Illinois, and other states could be Pennsylvania’s issues in a few years.

The Governor’s Budget fully funds the Commonwealth’s portion of the employer contribution rate of 12.36% for FY2012/13 in compliance with Act 120. As a result, PSERS’ ARC percentage is projected to increase from 27% in the FY2010/11 to 46.1% in FY2012/13. The FY2012/13 contribution rate of 12.36% includes a portion to fund the unfunded liability of the System. This will be the first payment toward the unfunded liability since FY2002/03 when PSERS funded ratio dropped below 100%. As depicted in the table at the top of the page, future projected contribution rate increases will raise PSERS’ ARC percentage to nearly 90% in FY2016/17 which is close to the average ARC percentage of major public plans according to the Public Fund Survey prepared by the National Association of State Retirement Administrators.

Act 120 Budgetary DeferralAs indicated previously, the funding and actuarial provisions of Act 120 have provided the Commonwealth and school employers a five to nine year period to appropriate funds for PSERS’ unfunded liability. Act 120 is projected to defer $8.9 billion in employer contributions in the next five years alone as seen in the table at the top of the page. If Act 120 was not in place, the employer contribution rate would have spiked to 29.65% in FY2012/13. That is an approximately $2.5 billion dollar difference between the 29.65% Pre-Act 120 employer rate and the 12.36% employer rate that will go into effect July 1, 2012.

PSERS Annual Required ContributionsThe schedule of employer contributions above shows historical trend information about the Annual Required Contribution (ARC) for pensions, and the percentage of the ARC contributed to the pension system. In addition, the Comparison of Employer Retirement Contributions table at the top of this page reflects projected ARC percentages through FY2016/17. In a report prepared by the PEW Center on the States, Pennsylvania ranks next to last (only New Jersey is lower), when comparing the five-year average of actuarially required contributions.

The national landscape is changing and the under funding of state pension plans is proving to be costly to New Jersey,

Comparison of Employer Retirement ContributionsPre-Act 120 Vs. Post Act 120

Fiscal Year

Ending June 30

(A)Appropria-

tionPayroll

(in thousands)

(B)

EmployerContribution

Rates

(C)Pre-Act 120Employer

Contributions(in thousands)

(D)=(A)*(B)Act 120

EmployerContributions(in thousands)

(E)=(C)-(D)BudgetaryAmountDeferred

(in thousands)

(E)*56%(56%)

State Shareof Deferral

(in thousands)

(E)*44%(44%)

School Shareof Deferral

(in thousands)

% of GASB’sAnnual

RequiredContributions

(ARC)

2013 $ 14,297,000 12.36% $ 4,239,061 $ 1,767,109 $ 2,471,952 $ 1,384,293 $ 1,087,659 46.1

2014 $ 14,746,607 16.75% $ 4,766,103 $ 2,470,057 $ 2,296,047 $ 1,285,786 $ 1,010,261 61.2

2015 $ 15,137,573 21.25% $ 5,121,041 $ 3,216,734 $ 1,904,307 $ 1,066,412 $ 837,895 75.3

2016 $ 15,553,058 25.56% $ 5,208,719 $ 3,975,362 $ 1,233,357 $ 690,680 $ 542,677 88.6

2017 $ 15,998,404 26.26% $ 5,273,074 $ 4,201,181 $ 1,071,893 $ 600,260 $ 471,633 89.9

Cumulative 5 Year Total Deferral $ 8,977,556 $ 5,027,431 $ 3,950,125


Page 25


Next Steps

As noted, the Commonwealth and School employers have benefited over the past six years and longer due to PSERS’ very low ARC. Illinois, New Jersey, Connecticut and other states are currently dealing with the repercussions of under-funding their pension plans. Act 120 has significantly reduced the employer’s normal cost for future new members via benefit reductions to new members, but a significant unfunded liability for service already rendered by active members still remains to be paid. As the chart on the bottom of page 23 shows, even if PSERS is closed to new members and the benefits are not replaced with another type of pension plan, the employer contribution rate to pay the unfunded liability still peaks at over 20% of payroll and remains there for over a decade. Act 120 has provided both the Commonwealth and the School employers with a five to nine year time horizon to gradually increase contributions to PSERS in a more budgetary feasible manner than the rate spike under previous law. The process now becomes an appropriation challenge to meet the gradual funding increases provided for in Act 120.

As in the past, PSERS remains committed to providing all available assistance to the Governor, General Assembly and School employers to address the appropriation challenges.



Page 26




Page 27

Consultants’ Fees($50,000 and Over)

The following benefit, investment, information technology and financial professional service firms were under con-tract to provide services to PSERS during the fiscal year ended June 30, 2011.

Firm Services Provided Consultant Fee

CoreSource, Inc. Postemployment healthcare benefits administration and claims adjudication

$ 12,168,669 *

Rx Solutions, Inc. Administration of postemployment healthcare benefits’ prescription drug plan

$ 4,538,549 *

ViTech Systems Group, Inc. Pension administration system services $ 4,452,065 *

The Segal Company Actuarial services and consulting for the Health Options Program and prescription drug plan

$ 3,116,391 *

Portfolio Advisors, LLC Private market consulting $ 1,500,000

Aksia LLC Hedge fund investment consulting $ 900,000

Financial Control Systems, Inc. Investment accounting application service provider $ 654,488

Buck Consultants LLC Pension benefit actuarial services $ 624,333 *

Independent Pharmaceutical Consultants, Inc.

Pharmacy benefit consulting services $ 612,332 *

Wilshire Associates General investment consulting $ 500,258

Courtland Partners, Ltd. Real estate investment consulting $ 260,093

Glass Lewis & Company Proxy voting $ 225,719

Clifton Gunderson LLP Financial audit of pension system and postemployment healthcare programs

$ 110,000 *

* Amounts as reported in PSERS’ Comprehensive Annual Financial Report.


Page 28



Page 29

Legislation Information

There has been no legislation enacted affecting the operations or the membership of the Public School Employees’ Retirement System, thus far into the 2011-2012 Legislative Session.



Page 30


Section 2 - PSERS FY2012/13 Budget

Section 2 - FY2012/13 Budget Section 2 - FY2012/13 Budget

Actual 2010/11

Available 2011/12

Governor’sBudget

Recommendation 2012/13

Total Personnel Expenses $ 24,083,906 $ 25,820,000 $ 26,684,000

Operating ExpensesTravel $ 104,206 $ 205,000 $ 190,000Training & Conference Registration 94,886 131,000 155,000 Telecomm - Recurring 620,273 545,000 545,000 Telecomm - Voice Hardware less than $5,000 57,132 5,000 5,000

Electricity 47,330 60,000 60,000 Consultant Services - Non IT 814,584 913,000 833,000 Consulting Services - Mgd Svcs (vendor hosted SW) 5,000 30,000 30,000 Consulting - Maint & Support - (post implemenation) - 65,000 161,000 Consulting - Security (Outsourced Inf Sec Services) - 10,000 12,000 Consulting - General (IT Support) 21,839 86,000 80,000 Consulting - Outsourced Infrastructure Svcs (DPH) 2,008,483 2,186,000 2,000,000 Legal Services/Fees 36,306 16,000 36,000 Specialized Services 302,938 440,000 353,000 Other Specialized Services 80,796 476,200 267,000 Advertising 5,771 10,000 10,000 Medical, Mental, & Dental Services 3,972 4,000 5,000 Software Licensing - Maintenance 1,115,209 1,097,500 1,056,000 Hardware Server - Maintenance 7,453 - - Hardware Network - Maintenance 13,257 15,000 15,000 Hardware Desktop - Maintenance 15,696 40,000 20,000 Contracted Maintenance Non EDP 257,442 243,000 189,000 Telecom Data Services - 120,000 120,000Contracted Repairs - Non EDP 18,628 35,000 15,000 Real Estate Rental 1,925,933 1,980,000 1,954,000 Vehicle Rental 1,994 4,000 4,000 Office Equipment Rental 263,351 294,000 298,000 Other Rentals 12,774 24,000 28,000 Office Supplies 230,690 329,000 302,000 Educational Supplies (Books) 1,868 21,000 11,000 Medical Supplies 314 1,000 1,000 SW License non-recurring less than $5,000 66,040 47,000 171,000 HW Desktop less than $5,000 256,184 85,000 55,000 Furniture and Fixtures 67,191 56,000 52,000 Other Equipment 45,820 32,000 - Motorized Equipment Supplies 29,958 40,000 41,000 Postage 1,185,283 1,331,000 1,561,000

Public School Employees’ Retirement SystemFiscal Year 2012/13 Budget

Section 2 - FY2012/13 Budget


(continued)

Actual 2010/11

Available 2011/12

Governor’sBudget

Recommendation 2012/13

Freight $ 7,409 $ 15,000 $ 10,000 Printing 398,288 447,800 479,000 Subscriptions 79,513 95,500 99,000 Membership Dues 38,971 42,000 45,000 Conference Expense 42,410 75,000 75,000 Insurance, Surety & Fidelity Bonds 20,658 24,000 24,000 Graphic Services 178 1,000 1,000 Other Operational Expenses 1,758,804 1,953,000 1,787,000 Total Operating Expenses $ 12,064,830 $ 13,630,000 $ 13,155,000

Fixed AssetsHW Server greater than $25,000 $ 260,987 $ - $ -HW Network greater than $25,000 - - 40,000 Telecomm -Voice HW greater than $25,000 - 513,000 - Telecomm - Data HW greater than $25,000 - - - Automobiles - 78,000 105,000 SW License non-recurring greater than $5,000 - 54,000 35,000 SW License recurring greater than $5,000 4,254,530 4,012,000 4,125,000 Office Equipment 19,800 - - Telecommunications Equipment 6,500 - - Total Fixed Assets $ 4,541,817 $ 4,657,000 $ 4,305,000

Total Administrative Budget $ 40,690,553 $ 44,107,000 $ 44,144,000Personnel Augmentations 881,000 915,000 959,000Total with Augmentations $ 41,571,553 $ 45,022,000 $ 45,103,000



(continued)

Administrative Cost per Member The chart above diplays a ten-year trend of PSERS’ admin-istrative cost per member. Expenses were relatively higher in FY2003/04 and FY2004/05 due to the implementation of the new pension administration system. The downward trend in cost indicates that PSERS has achieved operational efficiencies while its membership has risen each year. The System has accomplished this without significantly increas-ing the size of its staff.

Some of the cost savings initiatives include: processing significantly more retirements in a more efficient one-step process versus a two-step process used previously, imple-mentation of a new pension administration system which has automated procedures done manually, combining bulk mailings to members where possible, limiting travel and us-ing electronic means, when possible, to communicate with members and stakeholders.

The gap between the dotted blue line and red line on the chart shows the effects of the recent pension reform legisla-tion Act 120 of 2010 implementation. PSERS’ projected cost per member will be slightly higher for the short term as it absorbs the costs to adopt the new requirements.

$75.43 $74.55 $74.33

$95.73

$88.63

$79.86

$81.32

$77.07 $76.43

$74.26

$76.18 $76.63 $75.87

$70.00

$75.00

$80.00

$85.00

$90.00

$95.00

$100.00

2004 2005 2006 2007 2008 2009 2010 2011 2012 est. 2013 est.Fiscal Year Ending June 30

10 Year Trend of PSERS' Administrative Cost per Member(Active, Annuitants and Beneficiaries)

Cost per member w/o Act 120



Directed Commissions Recapture Program(unaudited)

Directed Commissions Recapture is a program whereby a portion of commissions incurred by PSERS through in-vestment trading activity is returned to PSERS. These funds, which are held in a restricted revenue account at Trea-

sury, can be used for the administration of the Fund or can be reinvested back into the asset allocation through a transfer to the PSERS Retirement Account. Expenditures paid from the Directed Commissions Recapture Program Budget have the same approval process as any other expenditure made by the Fund.

Actual ExpendituresFY2010/11

AvailableFY2011/12

Governor’sBudget

Recommendation FY2012/13

Budgetary Reserve - $2,000,000 $2,000,000

Total - $2,000,000 $2,000,000

Directed Commissions Recapture Program - Directed Commissions Apropriation #6012700000


Section 3 - Investment Information

Section 2 - FY2012/13 Budget Section 3 - Investment Information

Page 37


Investment Policy

The Public School Employees’ Retirement Board of Trustees (the Board) is responsible for, among other

things, the formulation of an Investment Policy (the Policy) for the Public School Employees’ Retirement System (the System). As articulated in the Public School Employees’ Retirement Code 24 Pa. C.S. §8521(a), the Board and PSERS’ Staff delegated with investment authority must act in a manner consistent with the Prudent Investor Standard, which requires “the exercise of that degree of judgment, skill and care under the circumstances then prevailing which persons of prudence, discretion and intelligence who are familiar with such matters exercise in the management of their own affairs not in regard to speculation, but in regard to the permanent disposition of the fund, considering the probable income to be derived therefrom as well as the probable safety of their capital.” The Prudent Investor Standard recognizes modern portfolio theory and guides investment and management decisions respecting individual assets so that the trade-offs between risk and return for each asset are considered in the context of an overall investment strategy.

The System’s Investment Policy Statement, Objectives, and Guidelines (the Policy), which is available at www.psers.state.pa.us, reflects the many implications of the Prudent Investor Standard. The Board reviews the Policy at least annually, and may make more frequent changes as necessary. The Policy establishes clear criteria for the management of the assets by or on behalf of the Board. For example:

• The Board, PSERS’ staff, investment consultants, and investment managers are assigned appropriate responsibilities and made to clearly understand the objectives and policies of the Board and the System;

• Allocation plans are prepared to guide the investment of the System’s assets;

• Guidelines are established for each investment category so that asset quality, diversification, and return can be monitored;

• Investment managers are given guidance and limitations on the investment of the System’s assets; and,

• The Board has created a meaningful basis for evaluating the investment performance of individual investment managers, as well as for evaluating overall success in meeting its objectives.

General Investment Objectives

The System seeks to provide benefits to its members through a carefully planned and well-executed

investment program. The overall investment objective of the Board is to provide adequate funding for member benefits. Realization of this overall return objective would be sufficient to achieve funding adequacy (defined as when the actuarial market value of assets is at least equal to the System’s projected benefit obligations) on an inflation-adjusted basis. The Policy also identifies the following general investment objectives and constraints:

Return Objectives• The System has an overall return objective of meeting

or exceeding the actuarial rate (currently 7.5%) over the long term;

• The assets of the System shall be invested to maximize the returns for the level of risk taken; and,

• The System shall strive to achieve a return that exceeds the Policy Index.

Risk Objectives• The assets of the System shall be diversified to

minimize the risk of losses within any one asset class, investment type, industry or sector distribution, maturity date, or geographic location; and,

• The System’s assets shall be invested so that the probability of investment losses (as measured by the Policy Index) in excess of 15% in any one year is no greater than 2.5% (or two standard deviations below the expected return).

Constraints• The System shall maintain adequate liquidity to

meet required benefit payments to the System’s beneficiaries;

• The System’s assets shall be invested in a manner that is consistent with the System’s long-term investment horizon; and,

• As a tax-exempt investor, the System’s assets may be invested without distinction between returns generated from income and returns generated from capital gains.

Section 2 - Budget Request

Page 38Page 38


Investment PerformanceNet of Fees

(for the period ended June 30, 2011)

Asset Class One Year

Three Year

Five Year

Ten Year

PSERS U.S. Equities 32.69 3.57 2.81 3.73U.S. Equity Policy Index (1) 31.98 3.77 3.32 3.67 PSERS Non-U.S. Equities 30.44 3.78 5.78 9.03MSCI All Country World ex. USA Investable Market Index (2) 30.26 1.96 4.50 8.11 PSERS U.S. Fixed Income 11.55 10.26 8.85 7.60U.S. Fixed Income Policy Index (3) 10.38 10.59 9.32 7.17 PSERS Global Fixed Income 14.41 9.75 8.78 8.84Global Fixed Income Policy Index (4) 15.98 7.47 7.87 8.07 PSERS Commodities 31.84 -8.47 N/A N/ADow Jones - UBS Commodity Index 25.91 -11.87 N/A N/A PSERS Real Estate (5) 20.18 -14.98 -5.42 6.01Blended Real Estate Index (6) 20.04 -1.09 3.85 8.50 PSERS Private Markets (5) 18.60 1.84 11.36 10.87Venture Economics Median Return, Vintage Year Weighted 11.37 2.82 5.49 4.04 PSERS Absolute Return (7) 13.18 N/A N/A N/AAbsolute Return of 8.0% annualized 8.00 N/A N/A N/A PSERS Cash (8) 0.30 N/A N/A N/AMerrill Lynch U.S. Treasury Bill 0 – 3 Months Index 0.15 N/A N/A N/A Total Fund (9) 20.37 0.44 3.89 6.25Policy Index 17.56 1.10 3.73 5.31

Annualized Total Returns(%)

(1) MSCI USA Investable Market Index effective April 1, 2009; previously was the Dow Jones Wilshire 5000 Index. (2) MSCI All Country World (ACW) ex. USA Investable Market Index effective July 1, 2008; previously was the MSCI ACW ex. U.S. Index. The benchmark was 30% hedged to the U.S. dollar from July 1, 2006 to March 31, 2009; otherwise, the benchmark is unhedged. (3) Returns presented are a blend of the Barclays Capital U.S. Universal Index (27.8%), Barclays Capital U.S. TIPS Index (Series - L) (27.8%), and Barclays U.S. High Yield Index (44.4%) effective April 1, 2010. The weights to these indexes have varied in previous quarters. Prior to April 1, 2007, the Barclays Capital Aggregate Bond Index was used in place of the Barclays Capital U.S. Universal Index. (4) Returns presented are a blend of the Barclays Multiverse Index (40.8%) and the JP Morgan Global Bond Index Emerging Markets Global Diversified (USD Unhedged) Index (59.2%). Between April 1, 2007 and March 31, 2010, the Barclays Multiverse Index was used; previous to April 1, 2007; the Barclays Global Aggregate Bond Index was used. (5) Returns reported on a one-quarter lag, except for publicly traded real estate security investments. (6) NCREIF Index effective April 1, 2010. The NCREIF Index is reported on a one-quarter lag. Previously, returns presented were a blend of the FTSE EPRA/NAREIT Global Real Estate Index and the NCREIF Index. Prior to October 1, 2007, the Dow Jones Wilshire Real Estate Securities Index was used in place of the FTSE EPRA/NAREIT Global Real Estate Index. (7) Absolute Return started April 1, 2009. (8) Cash started November 1, 2008. (9) Over the past 25 years ended June 30, 2011, the Fund earned an annualized rate of return of 8.79 percent which remained above the Fund’s assumed actuarial rate of return during that time period.


Page 39


Estimated Investment PerformanceNet of Fees

(for the period ended December 31, 2011) Annualized Total Returns(%)

Asset Class One Year

Three Year

Five Year

Ten Year

PSERS U.S. Equities 1.65 17.25 -0.26 3.60U.S. Equity Policy Index (1) 0.63 14.56 -0.07 3.70

PSERS Non-U.S. Equities -13.51 13.54 -0.88 7.90MSCI All Country World ex. USA Investable Market Index (2) -14.31 11.98 -2.16 6.88

PSERS U.S. Fixed Income 10.83 15.86 9.00 7.68U.S. Fixed Income Policy Index (3) 8.58 15.33 9.20 7.08

PSERS Global Fixed Income 2.09 10.41 7.15 8.12Global Fixed Income Policy Index (4) 3.15 6.39 6.41 7.39

PSERS Commodities -10.00 12.35 0.97 N/ADow Jones - UBS Commodity Index -13.32 6.39 -2.07 N/A

PSERS Real Estate (5) 13.21 -9.10 -7.23 6.28Blended Real Estate Index (6) 17.06 2.67 2.72 8.65

PSERS Private Markets (5) 9.91 4.71 9.23 11.56Venture Economics Median Return, Vintage Year Weighted 8.92 3.23 4.29 4.26

PSERS Absolute Return (7) 7.16 N/A N/A N/AAbsolute Return of 7.5% annualized 7.75 N/A N/A N/A

PSERS Cash (8) 1.97 1.14 N/A N/AMerrill Lynch U.S. Treasury Bill 0 - 3 Months Index 0.08 0.11 N/A N/A

Total Fund (9) 4.32 10.12 1.34 6.29Policy Index 3.10 8.97 1.18 5.28

(1) MSCI USA Investable Market Index effective April 1, 2009; previously was the Dow Jones Wilshire 5000 Index. (2) MSCI All Country World (ACW) ex. USA Investable Market Index effective July 1, 2008; previously was the MSCI ACW ex. U.S. Index. The benchmark was 30% hedged to the U.S. dollar from July 1, 2006 to March 31, 2009; otherwise, the benchmark is unhedged. (3) Returns presented are a blend of the Barclays Capital U.S. Universal Index (27.8%), Barclays Capital U.S. TIPS Index (Series - L) (27.8%), and Barclays U.S. High Yield Index (44.4%) effective April 1, 2010. The weights to these indexes have varied in previous quarters. Prior to April 1, 2007, the Barclays Capital Aggregate Bond Index was used in place of the Barclays Capital U.S. Universal Index. (4) Returns presented are a blend of the Barclays Multiverse Index (40.8%) and the JP Morgan Global Bond Index Emerging Markets Global Diversified (USD Unhedged) Index (59.2%). Between April 1, 2007 and March 31, 2010, the Barclays Multiverse Index was used; previous to April 1, 2007; the Barclays Global Aggregate Bond Index was used. (5) Returns reported on a one-quarter lag, except for publicly traded real estate security investments. (6) NCREIF Index effective April 1, 2010. The NCREIF Index is reported on a one-quarter lag. Previously, returns presented were a blend of the FTSE EPRA/NAREIT Global Real Estate Index and the NCREIF Index. Prior to October 1, 2007, the Dow Jones Wilshire Real Estate Securities Index was used in place of the FTSE EPRA/NAREIT Global Real Estate Index.(7) Absolute Return started April 1, 2009. The assumed actuarial rate of return for the fund was 8.0% from January 1 through June 30, 2011. The rate changed to 7.5% beginning July 1, 2011. (8) Cash started November 1, 2008. (9) Over the past 25 years ended December 31, 2011, the Fund earned an estimated annualized rate of return of 8.58 percent which remained above the Fund’s assumed actuarial rate of return during that time period.


Page 41


Asset Class

Market Value

(in millions)Percentage

of TotalTarget

Allocation %

Target Allocation

Range

U.S. Equity $ 4,926.9 10.5% 11.0% ± 5%Non-U.S. Equity 6,112.1 12.9 12.5 ± 5Fixed Income 9,846.2 20.8 21.2 ± 10Absolute Return 6,100.8 12.9 12.0 ± 4Commodities 2,034.3 4.3 6.0 ± 4Real Estate 5,733.2 12.1 11.8 -Private Markets 9,623.2 20.4 20.5 -Cash* 2,860.7 6.1 5.0 ± 5

Totals $ 47,237.4 100.0% 100.0%

Asset Allocation(as of December 31, 2011)

The Board reviews the long-term asset allocation targets of the System at least annually. In establishing the as-

set allocation plan, the Board will consult with its actuary, consultants, investment staff, and other sources of infor-

mation it deems appropriate in formulating this allocation. The purpose of the asset allocation is to meet the long-term financial needs and investment objectives of the System.

The following represents PSERS’ asset allocation as of December 31, 2011 (unaudited):

* Cash includes the total short-term investment fund (STIF) managed by PSERS in the PSERS Proprietary Fund and a balanced risk fund (All Weather) managed by Bridgewater Associates, Inc. STIF is unitized and the managers in the various asset classes are allocated units of STIF. For purposes of this schedule, units of STIF are not included in the various asset classes. For example, a U.S. Equity manager may manage $200 million, but if that manager has $10 million in STIF, $190 million would be included in U.S. Equity and $10 million would be included in Cash.

U.S. Equity11%

Non-U.S. Equity13%

Fixed Income21%

Absolute Return13%

Commodities 4%

Real Estate12%

Private Markets20%

Cash6%

Asset Allocationas of December 31, 2011


Asset Allocation(as of December 31, 2011)

(continued)

Number of Investment Managers and Portfolios

Public Market Asset Classes (ex. Real Estate)PSERS public market equity, fixed income, and commodity asset classes used 63 external investment managers who were responsible for 75 portfolios, and 7 internal portfolio managers who were responsible for 9 portfolios. There were 5 external public market investment managers with portfolios in multiple asset classes.

Portfolio Managers Portfolios/AccountsU.S. Equity Investments: External* 9 9 Internal 3 3Non-U.S. Equity Investments: External* 14 16 Internal 1 2Fixed Income Investments: External* 17 23 Internal** 2 3Commodities: External 5 5Absolute Return: External* 16 19Cash: External* 1 1 Internal** 1 1Securities Lending: External 1 2

Total 70 84 Total External* 63 75Total Internal 7 9

Private Markets and Real EstatePSERS private markets and real estate (public and private markets) asset classes used 114 active external general partners to invest in 243 limited partnership interests of various private market real estate, private debt, private equity, and venture capital funds. PSERS has 2 internal real estate investment managers who are responsible for 1 public market real estate portfolio. Finally, PSERS has 5 external and 2 internal real estate asset managers who oversee the direct management of 6 separate real estate accounts. A further breakdown of the external and internal portfolio managers follows:

* The Public Market Emerging Investment Manager Program consisted of 14 portfolio managers each managing a single portfolio. There were 7 U.S. Equity, 4 Non-U.S. Equity, 2 Fixed Income portfolios, and 1 Absolute Return portfolio in the Program.** PSERS managed $209.6 million for the System’s healthcare account.

Public Market Asset Classes (excluding Public Market Real Estate)


Page 43


Summary of PSERS’ U.S. Equity Investments

(as of December 31, 2011)

U.S. Equities represent one of eight major asset classes that PSERS uses to diversify the investments of

the Fund. PSERS’ investment plan diversifies equity investments and balances equity management styles. PSERS contracts with external investment managers and hires internal portfolio managers to manage U.S. portfolios.

Policy

U.S. Equities are utilized by the Fund primarily because their expected large return premiums versus inflation will, if realized, help preserve and enhance the real value of the Fund over long periods of time. The U.S. Equity asset class is to be managed on a total return basis.

U.S. Equity investments shall consist almost entirely of publicly-traded securities listed on the New York, American, and Nasdaq Stock Exchanges or derivatives such as swaps or listed futures to replicate the performance of U.S. equity indexes such as the S&P 500 Index. Swaps and futures are employed by PSERS to equitize cash and portable alpha portfolios.

PSERS’ Asset Allocation targets an eventual allocation of 11.0% of assets to U.S. Equities.

Market Value as of December 31, 2011: $4,926.9 million, or 10.5% of the Fund’s total market value.

Number of External Investment Managers: PSERS had contracts with nine external investment managers responsible for various U.S. Equity portfolios (including seven Public Market Emerging Manager Program managers).

Number of Internal Portfolio Managers: PSERS had three employees managing various U.S. Equity portfolios.

Types of Investment Portfolios at December 31, 2011:• 79.2% large capitalization stock strategies, 19.2%

medium/small capitalization stock strategies, and 1.6% in micro capitalization stock strategies

• 87.6% passively-managed portfolios and 12.4% actively-managed stock selection portfolios

• 87.7% was managed by internal portfolio managers and 12.3% is managed by external investment managers



Summary of PSERS’ U.S. Equity Portfolios (unaudited)(as of December 31, 2011)

Market Value (in millions)

% of U. S. Equities

% of Total Fund

Passively Managed Portfolios PSERS S&P 400 Index Fund $ 267.6 5.4% 0.6% PSERS S&P 500 Index Fund 3,816.3 77.5% 8.1% PSERS S&P 600 Index Fund 230.2 4.7% 0.5%

Total Passively Managed U.S. Equity $ 4,314.1 87.6% 9.2%

Actively Managed Large Cap Portfolios EDMP, Inc. $ 46.5 0.9% 0.1% Hellman Jordan 31.7 0.6% 0.1% Other 5.6 0.1% 0.0%

Total Actively Managed Large Cap U.S. Equity $ 83.8 1.7% 0.2%

Actively Managed Mid and Small Cap Portfolios AH Lisanti Capital Growth, LLC $ 56.4 1.1% 0.1% Conestoga Capital Advisors 61.6 1.3% 0.1% First Pacific Advisors, Inc. 172.6 3.5% 0.4% Harvest MLP II 97.7 2.0% 0.2% Opus Capital Management 61.7 1.3% 0.1%

Total Actively Managed Mid and Small Cap U.S. Equity $ 450.1 9.1% 1.0%

Actively Managed MicroCap Portfolios Ativo Capital Management $ 19.8 0.4% 0.0% NorthPointe Capital, LLC 59.1 1.2% 0.1%

Total Actively Managed MicroCap U.S. Equity $ 78.9 1.6% 0.1%

Total U.S. Equity $ 4,926.9 100.0% 10.5%

Numbers may not add due to rounding.


Page 45


Summary of PSERS’ Non-U.S. Equity Investments


Non-U.S. Equities represent one of eight major asset classes that PSERS uses to diversify the investments

of the Fund. PSERS’ investment plan diversifies equity investments and balances equity management styles. PSERS contracts with external investment managers and hires internal portfolio managers to manage Non-U.S. portfolios.

Policy

Non-U.S. Equities are utilized by the Fund primarily because their expected large return premiums versus inflation will, if realized, help preserve and enhance the real value of the Fund over long periods of time. The Non-U.S. Equity asset class is to be managed on a total return basis.

Non-U.S. Equity investments shall consist almost entirely of publicly-traded securities listed on the exchanges in the countries approved by PSERS that provide PSERS with an equity interest in private sector concerns (i.e. common stock, preferred stock, convertible preferred stock, convertible

bonds, etc.). Swaps and futures are employed by PSERS to equitize cash and portable alpha portfolios.

PSERS’ Asset Allocation targets an eventual allocation of 12.5% of assets to Non-U.S. Equities.


Number of External Investment Managers: PSERS had contracts with 14 external investment managers responsible for various Non-U.S. Equity portfolios (including four Public Market Emerging Investment Manager Program managers).

Number of Internal Portfolio Managers: PSERS had one employee managing two Non-U.S. Equity portfolios.

Types of Investment Portfolios at December 31, 2011:• 82.7% large capitalization stock strategies, 11.1%

small capitalization strategies, and 6.2% emerging market stock strategies

• 64.8% passively-managed portfolios (managed internally) and 35.2% actively-managed portfolios (managed externally)



Page 46Page 46


Summary of PSERS’ Non-U.S. Equity Portfolios (unaudited)(as of December 31, 2011)


% of Non-U. S. Equities

% of Total Fund

Passively Managed Portfolios PSERS ACWI x-US Index Fund $ 3,756.6 61.5% 8.0% PSERS World X-US Small Cap 201.4 3.3% 0.4%

Total Passively Managed Non-U.S. Equity $ 3,958.0 64.8% 8.4%

Actively Managed Developed Large Cap Portfolios Baillie Gifford Overseas Ltd. $ 407.4 6.7% 0.9% BlackRock Financial Management, Inc. 371.2 6.1% 0.8% John Hsu Capital Group, Inc. 66.5 1.1% 0.1% Marathon Asset Management Limited 402.9 6.6% 0.9% Shah Capital Management 39.3 0.6% 0.1% Pareto Investment Management, Ltd. 8.0 a 0.1% 0.0%

Total Actively Managed Developed Large Cap Non-U.S. Equity $ 1,295.3 21.2% 2.7%

Actively Managed Emerging Market Portfolios Batterymarch Financial Mgmt., Inc. $ 77.7 1.3% 0.2% Glovista Investments 26.1 0.4% 0.1% Wasatch Advisors, Inc. 130.7 2.1% 0.3% Wellington Management Co., LLP 85.8 1.4% 0.2% Westwood Global Investments 61.0 1.0% 0.1%

Total Actively Managed Emerging Market Non-U.S. Equity $ 381.3 6.2% 0.8%

Actively Managed Developed Small Cap Portfolios Acadian Asset Management $ 126.5 2.1% 0.3% Batterymarch Financial Mgmt., Inc. 51.9 0.8% 0.1% Oberweis Asset Management, Inc. 71.7 1.2% 0.2% Pyramis Global Advisors 97.2 1.6% 0.2% Wasatch Advisors, Inc. 130.2 2.1% 0.3%

Total Actively Managed Developed Small Cap Non-U.S. Equity $ 477.5 7.8% 1.0%

Total Non-U.S. Equity $ 6,112.1 100.0% 12.9%

a - The Market Value represents the cumulative net gain on unsettled foreign exchange contracts. Numbers may not add due to rounding.


Page 47


Summary of PSERS’ Fixed Income Investments


Fixed Income represents one of eight major asset classes that PSERS uses to diversify the investments of the

Fund. PSERS’ investment plan diversifies Fixed Income investments and balances Fixed Income management styles. PSERS contracts with external investment managers and hires internal portfolio managers to manage portfolios.

Policy

Fixed Income investments are utilized by the Fund primarily because of their ability to serve as a hedge against disinflation and/or deflation, their general ability to produce current income in the form of periodic interest payments, and because such investments help diversify the overall Fund. The Fixed Income class is to be managed on a total return basis.

PSERS’ Asset Allocation targets an eventual allocation of 21.2% of assets to Fixed Income, 5.2% of which is designated to U.S. core/core plus strategies, 5.0% of which is designated to TIPS strategies, 6.0% of which is designated to high yield/opportunistic strategies, 3.0% of which is designated to non-U.S. developed markets strategies, and 2.0% of which is designated to be Emerging Markets strategies. Of the total Fixed Income allocation,

16.2% is assigned to U.S. fixed income portfolios and 5.0% is assigned to global fixed income portfolios. Fixed Income investments are targeted to be 100.0% actively managed.


Number of External Investment Managers: PSERS had contracts with 17 external investment managers responsible for various Fixed Income portfolios (including two Public Market Emerging Investment Manager Program managers).

Number of Internal Portfolio Managers: PSERS had two employees managing various Fixed Income portfolios.

Types of Investment Portfolios at December 31, 2011:• 87.3% U.S. fixed income portfolios and 12.7%

global fixed income portfolios

• 26.6% core/core plus strategies portfolios, 30.3% TIPS strategies portfolios, 30.4% high yield/opportunistic strategies portfolios, 5.2% non-U.S. developed markets strategies portfolios, and 7.5% emerging markets strategies portfolios

• 27.7% was managed by internal portfolio managers and 72.3% was managed by external investment managers



Page 48Page 48



% of Total Fixed

Income % of

Total FundActively Managed U.S. Core/Core Plus FixedIncome Portfolios BlackRock U.S. Extended Core Global Alpha Fund $ 547.7 5.6% 1.2% Pacific Investment Mgmt. Co. (PIMCO) 469.2 4.8% 1.0% Piedmont Investment Advisors 49.3 0.5% 0.1% PSERS Active Aggregate 1,251.8 12.7% 2.7% Pugh Capital Management, Inc. 86.1 0.9% 0.2% Western Asset Management Co. 213.9 2.2% 0.5% Other 1.2 0.0% 0.0%

Total Actively Managed U.S. Core/Core Plus Fixed Income $ 2,619.2 26.6% 5.7%

Actively Managed Treasury Inflation-Protected Securities (TIPS) Portfolios Bridgewater Associates, Inc. $ 1,505.0 15.3% 3.2% PSERS TIPS Portfolio 1,479.5 15.0% 3.1%

Total Actively Managed Treasury Inflation- Protected Securities (TIPS) $ 2,984.5 30.3% 6.3%

Actively Managed High Yield Fixed Income Portfolio MacKay-Shields Financial Corporation $ 387.7 3.9% 0.8%

Actively Managed Credit Opportunity Portfolios BlackRock Mortgage (Offshore) Investors $ 582.2 5.9% 1.2% Brigade Distressed Value Offshore Fund 100.4 1.0% 0.2% Cerberus Levered Loan Opportunities Fund, LP 104.6 1.1% 0.2% LBC Credit Partners II, LP 154.2 1.6% 0.3% Mariner Investment Group 268.1 2.7% 0.6% Oaktree Loan Fund 169.1 1.7% 0.4% Pacific Investment Mgmt. Co. (PIMCO) Mortgage 201.2 2.0% 0.4% Sankaty Advisors LLC 546.0 5.5% 1.2% Sankaty Credit Opportunities Fund IV, LP 400.8 4.1% 0.8% Sankaty Middle Market Opportunities Fund 83.5 0.8% 0.2%

Total Actively Managed Credit Opportunity Fixed Income $ 2,610.1 26.5% 5.5%

Total Actively Managed U.S. Fixed Income $ 8,601.6 87.3% 18.3%

Summary of PSERS’ Fixed Income Portfolios (unaudited)(as of December 31, 2011)


Page 49



% of Total Fixed

Income % of

Total FundActively Managed Non-U.S. Developed Markets

Fixed Income Portfolios Alliance Bernstein $ 246.8 2.5% 0.5% Rogge Global Partners 204.2 2.1% 0.4% Other 56.8 0.6% 0.1%

Total Actively Managed Non-U.S. Developed Markets Fixed Income $ 507.8 5.2% 1.0%

Actively Managed Global Emerging Markets FixedIncome Portfolios Franklin Templeton $ 390.3 4.0% 0.8% Stone Harbor Investment Partners 346.6 3.5% 0.7%

Total Actively Managed Global Emerging Markets Fixed Income $ 736.9 7.5% 1.5%

Total Fixed Income $ 9,846.2 100.0% 20.8%

Summary of PSERS’ Fixed Income Portfolios (unaudited)(as of December 31, 2011)

(continued)




Summary of PSERS’ Absolute Return Investments


Absolute Return represents one of eight major asset classes that PSERS uses to diversify the investments

of the Fund. PSERS contracts with external investment managers to manage absolute return portfolios.

Policy

Absolute Return investments are utilized by the Fund primarily to generate returns that are uncorrelated with other asset classes or investments and help diversify the overall Fund. The benchmark for PSERS’ Absolute Return investments is an absolute return of 7.5% annualized with risk of 7.5% or lower at the program level over a full market cycle.



% of Total Absolute Return

% of Total Fund

Actively Managed Absolute Return Portfolios AQR Capital Management $ 794.4 13.0% 1.7% Black River Asset Management, LLC 251.5 4.1% 0.5% BlackRock Capital Structure Investments Fund 249.6 4.1% 0.5% BlackRock Financial Management, Inc. 689.5 11.3% 1.5% Boston Company Asset Management 205.9 3.4% 0.4% Brevan Howard Fund, Ltd. 399.7 6.6% 0.8% Bridgewater Associates, Inc. 844.2 13.8% 1.8% Brigade Capital Management 714.3 11.7% 1.5% Capula Global Relative Value Fund 212.7 3.5% 0.5% Capula Special Opportunities Fund 242.5 4.0% 0.5% Capula Tail Risk Fund 286.2 4.7% 0.6% Caspian Capital Advisors, LLC 189.7 3.1% 0.4% Denali Advisors, LLC 39.4 0.6% 0.1% FX Concepts, Inc. 12.7 0.2% 0.0% Lazard Asset Management 113.0 1.9% 0.2% Nephila Capital, Ltd. 255.1 4.2% 0.5% Pacific Investment Mgmt. Co. (PIMCO) 411.5 6.7% 0.9% Pareto Investment Management, Ltd. (5.3) a 0.0% 0.0% Robeco Investment Management, Inc. 194.3 3.2% 0.4%

Total Absolute Return $ 6,100.8 100.0% 12.9%

Summary of PSERS’ Absolute Return Portfolios (unaudited)(as of December 31, 2011)

a -The Market Value represents the cumulative net loss on unsettled foreign exchange contracts.

Absolute Return investments shall be in a variety of unique, non-directional investment strategies, including equity and fixed income long/short, global macro, currency, option, capital structure arbitrage, and other strategies. The Fund shall diversify this program by manager and style.

PSERS’ Asset Allocation currently targets an allocation of 12.0% of assets in Absolute Return investments.


Number of External Investment Managers: PSERS had contracts with 16 external investment managers responsible for the various Absolute Return portfolios (including one Public Market Emerging Manager Program manager).

Number of Internal Investment Managers: None.


Page 51


Summary of PSERS’ Commodity Investments


Commodities represent one of eight major asset classes that PSERS uses to diversify the investments of the

Fund. PSERS’ investment plan diversifies Commodity investments and balances Commodity management styles. PSERS contracts with external investment managers to manage commodity portfolios.

Policy

Commodity investments are utilized by the Fund for diversification within the portfolio and to act as a hedge against unanticipated inflation. The prices of commodities are determined primarily by near-term events in global supply and demand conditions and are positively related with both the level of inflation and the changes in the rate of inflation. However, stock and bond valuations are based on longer-term expectations and react negatively to inflation. Therefore, commodity returns have had a historically

negative correlation to stock and bond returns. As such, commodities, when combined with stocks and bonds, lower the risk of a portfolio.

The Fund benchmarks its Commodity investments to the Dow Jones-UBS Commodity Index (DJ UBS). The DJ UBS is a broadly diversified basket of 20 commodities from 4 sectors (energy, industrial metals, precious metals, and agriculture).

PSERS’ Asset Allocation currently targets an allocation of 6.0% of assets to Commodity investments and are targeted to be 100.0% actively managed.

Market Value of December 31, 2011: $2,034.3 million, or 4.3% of the Fund’s total market value.

Number of External Investment Managers: PSERS had contracts with five external investment managers to manage Commodity portfolios.

Number of Internal Investment Managers: None.

Summary of PSERS’ Commodity Portfolios (unaudited)(as of December 31, 2011)


% of Total Commodities

% of Total Fund

Full Discretion Commodity Portfolios Deutsche Asset Management $ 199.8 9.8% 0.4% Wellington Management Company, LLP 582.1 28.6% 1.2%

Total Full Discretion Commodities $ 781.9 38.4% 1.6%

Core/Enhanced Commodity Portfolios Credit Suisse Asset Management $ 301.8 14.8% 0.7% Gresham, LLC 477.6 23.5% 1.0% Schroders Investment Management 473.1 23.3% 1.0%

Total Core/Enhanced Commodities $ 1,252.5 61.6% 2.7%

Total Commodities $ 2,034.3 100.0% 4.3%



Page 52Page 52


Summary of PSERS’ Real Estate Investments


Real Estate represents one of eight major asset classes that PSERS uses to diversify the investments of the

Fund. The primary objective of the real estate program is to invest in real property directly or indirectly through global publicly-traded real estate securities (PTRES), direct investments, commingled fund investments, limited partnerships, and direct private placements. This is done in a prudent manner to create a diversified real estate portfolio of high quality investments which will enhance PSERS’ overall long-term investment performance, diversify the asset base, and reduce the volatility of returns of the total investment portfolio.

Policy

The real estate program is designed to create the highest possible risk-adjusted returns in a controlled, coordinated, and comprehensive manner. Recognizing that real estate market conditions and PSERS’ objectives for real estate may change over time, the program is reviewed periodically and updated as needed. The existing target allocation is 11.8% of total assets.

Investments are made through global PTRES, direct investments, commingled fund investments, limited partnerships, and direct private placements. It is PSERS’ intent to liquidate any investment at the point in time when its value has been maximized. PSERS seeks to diversify its real estate portfolio by investing in a mix of Opportunistic (25%), Value Added (50%), and Core (25%) real estate investments.

Opportunistic real estate investing is the financing, acquisition or investment in real estate assets, real estate companies, portfolios of real estate assets, private and public REIT’s that do not have access to traditional public equity or debt financing. Opportunistic real estate consists of investment strategies that seek to exploit market inefficiencies with an emphasis on total return. Opportunistic investments require specialized expertise

and the flexibility to respond quickly to market imbalances or changing market conditions. Investments may include non-traditional property types and/or assets that involve development, re-development, or leasing risks.

Value Added real estate investing typically focuses on both income growth and appreciation potential, where opportunities created by dislocations and inefficiencies between and within segments of the real estate capital markets are capitalized upon to enhance returns. Investments can include high-yield equity and debt investments and undervalued or impaired properties in need of repositioning, re-development or leasing.

Core real estate investing is the financing, acquisition or investment in real estate assets, real estate companies, portfolios of real estate assets, private REITs that are broadly diversified by property type and location, focused primarily on completed, well-leased properties with modest levels of leasing risk, using relatively low leverage, and investing mainly in institutional property types and qualities allowing for relative ease of resale.

Market Value as of December 31, 2011: $5,733.2 million or 12.1% of the Fund’s total market value. This market value represents the combination of December 31, 2011 and September 30, 2011 market values adjusted for cash flows that occurred during the fourth quarter of 2011.

Number of External Investment Managers: PSERS had contracts with 5 external directly managed real estate asset managers and 39 external general partners to manage the real estate separate account, public securities, and pool fund portfolios.

Number of Internal Portfolio Managers: PSERS had two employees managing real estate portfolios.

Types of Investment Portfolios at December 31, 2011:• 3.9% Separate Account Portfolios

• 3.1% Public Securities Portfolios

• 93.0% Pooled Fund Portfolios


Page 53


Summary of PSERS’ Real Estate Portfolios (unaudited)(as of December 31, 2011)


Separate Accounts Market Value (in millions)

% of Total Real Estate

% of Total Fund

Charter Oak Advisors, Inc. $ 112.6 2.0% 0.2% GF Management, Inc. 55.2 1.0% 0.1% Grandbridge Real Estate Capital, LLC 0.9 0.0% 0.0% Grosvenor Fund Management U.S., Inc. 8.4 0.1% 0.0% L&B Realty Advisors, LLP 24.8 0.4% 0.1% Prudential Agricultural Group 24.8 0.4% 0.1%

Total Real Estate Separate Accounts $ 226.7 3.9% 0.5%

Public Securities

Actively Managed Publicly Traded Real EstateSecurities Portfolio Security Capital Research & Management, Inc. - Preferred Growth $ 177.5 3.1% 0.4%



Page 54Page 54



(continued)

Pooled Funds

Market Value

(in millions) % of Total

Real Estate % of Total Fund

Almanac Realty Securities V, L.P. $ 64.5 1.1% 0.1%Apollo European Real Estate Fund III, L.P. 98.2 1.7% 0.2%Apollo Real Estate Finance Corp. 103.8 1.8% 0.2%Apollo Value Enhancement Fund VII, L.P. 129.6 2.3% 0.3%AREFIN Co-Invest Corp. 55.9 1.0% 0.1%AvalonBay Value Added Fund, L.P. 77.2 1.3% 0.2%AvalonBay Value Added Fund II, L.P. 98.8 1.7% 0.2%Avenue Real Estate Fund Parallel, L.P. 63.3 1.1% 0.1%Beacon Capital Strategic Partners V, L.P. 81.2 1.4% 0.2%Blackstone Real Estate Partners Europe III, L.P. 75.6 1.3% 0.2%Blackstone Real Estate Partners V. TE.1, L.P. 210.9 3.7% 0.4%Blackstone Real Estate Partners VI. TE.1, L.P. 440.9 7.7% 0.9%Blackstone Real Estate Partners VII. TE.2, L.P. 27.0 0.5% 0.1%BPG Co-Investment Partnership, L.P. 15.6 0.3% 0.0%BPG Investment Partnership, Fund V, L.P. 16.8 0.3% 0.0%BPG Investment Partnership, Fund VI, L.P. 35.2 0.6% 0.1%Broadway Partners RE Fund II, L.P. 28.1 0.5% 0.1%Broadway Partners Parallel Fund P III, L.P. 8.4 0.1% 0.0%Cabot Industrial Value Fund III, L.P. 44.7 0.8% 0.1%Carlyle Europe Real Estate Partners III-A, L.P. 149.2 2.6% 0.3%Carlyle Realty III, L.P. 37.1 0.6% 0.1%Carlyle Realty IV, L.P. 78.7 1.4% 0.2%Carlyle Realty V, L.P. 192.0 3.3% 0.4%Carlyle Realty VI, L.P. 10.1 0.2% 0.0%Centerline High Yield CMBS Fund III, L.L.C. 1.4 0.0% 0.0%Cornerstone Patriot Fund, L.P. 70.8 1.2% 0.1%CS Strategic Partners IV Real Estate, L.P. 48.8 0.9% 0.1%CSFB Strategic Partners II RE, L.P. 12.2 0.2% 0.0%CSFB Strategic Partners III RE, L.P. 39.6 0.7% 0.1%DLJ Real Estate Capital Partners II, L.P. 16.4 0.3% 0.0%DLJ Real Estate Capital Partners III, L.P. 88.5 1.5% 0.2%DLJ Real Estate Capital Partners IV, L.P. 135.4 2.4% 0.3%DRA Growth and Income Fund VI, L.P. 90.8 1.6% 0.2%DRA Growth and Income Fund VII, L.P. 2.4 0.0% 0.0%Fillmore West Fund, L.P. 59.8 1.0% 0.1%Fortress Investment Fund IV, L.P. 80.8 1.4% 0.2%Fortress Investment Fund V (Fund A) , L.P. 165.5 2.9% 0.4%


Page 55



(continued)

Pooled Funds (continued)

Market Value


Real Estate % of

Total FundFortress PSERS Investment, L.P. $ 17.4 0.3% 0.0%Hines U.S. Office Value Added Fund, L.P. 40.8 0.7% 0.1%JPMCB Strategic Property Fund 19.1 0.3% 0.0%LCCG Real Estate Special Situations Mortgage Fund, LLC 7.5 0.1% 0.0%Legg Mason Real Estate Capital, Inc. 7.6 0.1% 0.0%Legg Mason Real Estate Capital II, Inc. 97.1 1.7% 0.2%LEM Real Estate Mezzanine Fund II, L.P. 44.7 0.8% 0.1%LF Strategic Realty Investors I, L.P. 1.7 0.0% 0.0%LF Strategic Realty Investors II, L.P. 91.9 1.6% 0.2%Lubert-Adler Real Estate Fund III, L.P. 8.5 0.1% 0.0%Lubert-Adler Real Estate Fund IV, L.P. 19.7 0.3% 0.0%Lubert-Adler Real Estate Fund V, L.P. 31.4 0.5% 0.1%Lubert-Adler Real Estate Fund VI, L.P. 55.8 1.0% 0.1%Madison Marquette Retail Enhancement Fund, L.P. 58.8 1.0% 0.1%MGPA Asia Fund III, L.P. 125.4 2.2% 0.3%MGPA Europe Fund III, L.P. 98.4 1.7% 0.2%Morgan Stanley Real Estate Fund II L.P. 5.1 0.1% 0.0%Morgan Stanley Real Estate Fund IV Sp. Dom. L.P. 17.1 0.3% 0.0%Morgan Stanley Real Estate Fund IV Sp. Int'l L.P. 18.9 0.3% 0.0%Morgan Stanley Real Estate Fund V Sp. Int'l L.P. 82.7 1.4% 0.2%Morgan Stanley Real Estate Fund V Sp. U.S. L.P. 10.1 0.2% 0.0%Morgan Stanley Real Estate Fund VI Sp. Int'l L.P. 98.5 1.7% 0.2%Morgan Stanley Real Estate Fund VII Global L.P. 92.5 1.6% 0.2%O' Connor North American Property Partners, L.P. 41.7 0.7% 0.1%O' Connor North American Property Partners II, L.P. 65.4 1.1% 0.1%Paladin Realty Latin America III, L.P. 45.5 0.8% 0.1%Peabody Global Real Estate Partners, L.P. 2.7 0.0% 0.0%Prime Property Fund, LLC 3.5 0.1% 0.0%PRISA 74.3 1.3% 0.2%ProLogis North American Industrial Fund, L.P. 134.8 2.4% 0.3%RCG Longview Debt Fund IV, L.P. 116.0 2.0% 0.2%RCG Longview Equity Fund PA PSERS, L.P. 85.3 1.5% 0.2%RREEF America REIT II, Inc. 3.0 0.1% 0.0%Silverpeak Legacy PSERS Real Estate, L.P. 39.4 0.7% 0.1%Silverpeak Legacy Real Estate Pension Partners II, L.P. 103.8 1.8% 0.2%Silverpeak Legacy Real Estate Pension Partners III, L.P. 63.7 1.1% 0.1%Stockbridge Real Estate Fund I, L.P. 241.1 4.2% 0.5%


Page 56Page 56



(continued)


Pooled Funds (continued)

Market Value


Real Estate % of Total Fund

Stockbridge Real Estate Fund II-A, L.P. $ 69.7 1.2% 0.1%Stockbridge Real Estate Fund III, L.P. 81.3 1.4% 0.2%Strategic Partners Value Enhancement Fund, L.P. 45.7 0.8% 0.1%UBS Trumbull Property Fund, L.P. 67.8 1.2% 0.1%Westbrook Real Estate Fund, L.P. 1.4 0.0% 0.0%Whitehall Street Real Estate V & VI, L.P. 0.4 0.0% 0.0%Whitehall Street Real Estate VII & VIII, L.P. 1.5 0.0% 0.0%William E. Simon & Sons Realty Partners, L.P. 35.2 0.6% 0.1%

Total Real Estate Pooled Funds $ 5,329.1 93.0% 11.3%

Total Real Estate $ 5,733.2 100.0% 12.1%



Page 57


Summary of PSERS’ Private Market Investments


Private Market investments represent one of eight major asset classes that PSERS uses to diversify the

investments of the Fund. The primary vehicle used to invest funds in this asset class is the limited partnership. Individual management groups selected by PSERS form these partnerships for the purpose of investing in and managing private equity and unlisted-subordinated debt positions on behalf of PSERS and other limited partners. PSERS’ Asset Allocation currently targets an allocation of 20.5% to Private Market investments. Private Market Investment sub-asset class explanations are as follows:

Private Equity involves investments in private companies which normally do not have technology risk associated with traditional venture capital investments. It has evolved to include the financing of more mature, profitable companies that do not have access to, or qualify for, public equity and debt funding. Private Equity strategies include:

• Buyouts - Investment strategy is to acquire the assets of a publicly or privately held company. A subset of this category is the leveraged buyout, where financing enables companies to be acquired through the use of borrowed funds. Typically, the assets of target companies serve as collateral for loans originated in the transaction.

• Secondary Partnerships - An investment strategy to acquire interests in established limited partnerships. Secondary investing can often be lucrative due to the fact that the partnerships are purchased at significant discounts to net asset value and the timing of the purchase frequently occurs as the acquired partnerships begin to realize profits.

Venture Capital is considered the financing of young, relatively small, rapidly growing companies. In traditional venture capital investments, companies have a 5-10 year investment horizon and develop technology for a particular market, such as pharmaceuticals, software, medical products, etc. Venture capital strategies are typically classified as follows:

• Seed - An investment strategy that involves companies that are still in the conceptual stage of growth. Seed stage investing involves product viability risk.

• Early Stage - An investment strategy involving financing portfolio companies for product development and initial marketing, manufacturing and sales activities. Typically, early stage companies have been formed, but revenues have not been realized. Early stage investment involves risks associated with defining competitive markets, developing production and marketing channels.

• Later Stage - An investment strategy involving financing portfolio companies for rapid expansion. Risk at this stage revolves around capturing market share while increasing production and delivery capabilities and building sales volume.

• Balanced - An investment strategy including a variety of portfolio company development stages (Seed, Early, Later, etc.).

Private Debt involves investments in the secured and/or unsecured debt obligations of private and/or public companies. This debt is typically acquired through directly negotiated or competitively bid transactions. Owners of these debt instruments typically take either an active or passive role in the management of the firm. Private Debt strategies are typically classified as follows:

• Mezzanine - Investments in unsecured or junior debt securities with equity enhancements such as warrants or nominally priced equity.

• Distressed Debt - Investments in the debt obligations of under-performing companies that are in need of operating or financial restructuring, and are either in or out of bankruptcy.

• Structured Products - Investments in the debt tranche of a security that is generally leveraged and backed by a diversified pool of assets. Assets include bank debt, investment grade debt, non-investment grade debt, or mortgages.

Policy

For the Private Market investments program, PSERS’ long-term investment objective is to achieve a risk-adjusted total return, net of fees, that exceeds market returns for similar investments, or benchmark returns furnished by Venture Economics on a vintage year weighted basis.


Page 58Page 58


Summary of PSERS’ Private Market Investments

(as of December 31, 2011)(continued)

Market Value as of December 31, 2011: $9,623.2 million, or 20.4% of the Fund’s total market value. Sub-asset class market values (unaudited) and fund percentages were as follows:

An objective of PSERS’ Private Market Investments Program is to maintain investment diversification by industry, geographic location, and investment strategy. Diversification levels as of December 31, 2011 are as follows:

Secondary Funds 31.3%Services 12.4%Industrial 11.8%Financial 8.9%Computer 8.3%Medical 7.8%Communication 6.9%Consumer 4.4%Transportation 3.1%Energy 2.4%Real Estate 2.0%Other 0.7%

PSERS’ Private Equity Program has committed a total of $15,409.0 million to 111 partnerships through December 31, 2011. Six of these partnerships are located in Pennsylvania. Twenty-six of the 31 international investment partnerships are included within the private equity sector. The international investments serve to increase the diversification of this asset class while providing the opportunity of increasing total returns.

PSERS’ Venture Capital Program consists of 50 partnerships with committed capital totaling $2,020.5 million through December 31, 2011. A significant number of the venture capital partnerships, 27 out of 50, are located in Pennsylvania. One of the 31 international partnerships is included within the venture capital sector.

PSERS Private Debt Program has committed $3,859.3 million to 26 partnerships through December 31, 2011. The Private Debt Program was initiated in 2000 by re-allocating $1.0 billion from the Fixed Income allocation to take advantage of the attractive market conditions within the mezzanine and distressed debt sectors. Two partnerships are located in Pennsylvania, and 4 of the 31 international partnerships are included within the private debt sector.

International 29.8%New York 17.9%California 13.3%Massachusetts 4.4%Texas 4.2%Pennsylvania 3.8%Connecticut 2.5%New Jersey 2.4%Illinois 2.4%Florida 1.7%Maryland 1.7%Michigan 1.3%Ohio 1.2%Colorado 1.0%Other 12.4%

Industry diversification (by number of companies in each industry)

Geographical diversity (by percentage of companies located in each state)

Total Commitment (in millions)

Market Value

(in millions)

Percent Allocation to Total Fund

Private Equity $ 15,409.0 $ 7,147.2 15.1%Venture Capital 2,020.5 787.8 1.7Private Debt 3,859.3 1,688.2 3.6Totals $ 21,288.8 $ 9,623.2 20.4%


Page 59


Summary of PSERS’ Active Private Market Investments Committed, Drawn, and Distributed (unaudited)


Partnership NamePrivate Equity:

Vintage Year

Capital Committed

Capital Drawn Distributions*

ABS Capital Partners II 1996 $ 40,000,000 $ 39,291,734 $ 45,555,770Actis Emerging Markets 3, L.P. 2007 200,000,000 140,529,120 17,030,258 Allegheny New Mountain Partners, L.P. 2004 100,000,000 82,828,915 63,758,208 Apax Europe VII, L.P. 2007 259,200,000 240,163,210 35,414,941 Baring Asia Private Equity Fund III, L.P. 2005 122,500,000 130,060,156 222,141,490 Baring Asia Private Equity Fund IV, L.P. 2007 300,000,000 280,420,551 104,853,409 Baring Asia Private Equity Fund V, L.P. 2011 200,000,000 15,048,781 - Blue Point Capital Partners (B), L.P. 2001 103,750,000 87,061,943 109,881,859 Blue Point Capital Partners II (B), L.P. 2007 100,000,000 74,038,120 41,483,160 Bridgepoint Capital II (Secondary) 1998 84,714,906 81,290,641 165,509,605 Bridgepoint Europe I 1998 79,622,624 75,126,567 134,639,237 Bridgepoint Europe II 2001 388,800,000 317,885,713 589,030,287 Bridgepoint Europe III A, L.P. 2005 259,200,000 249,204,188 49,173,718 Bridgepoint Europe IV, L.P. 2008 388,800,000 226,138,285 - Bruckmann, Rosser, Sherrill & Co. L.P. 1995 25,000,000 24,465,163 44,415,345 Capital International Private Equity Fund V L.P. 2007 200,000,000 182,402,952 91,589,554 Capital International Private Equity Fund VI, L.P. 2011 100,000,000 6,138,256 (31,258)Catterton Growth Partners, L.P. 2008 75,000,000 60,542,237 10,390,138 Catterton Partners V, L.P. 2004 100,000,000 100,933,794 57,857,963 Catterton Partners VI, L.P. 2006 130,000,000 105,043,825 9,410,574 CIGNA 1988 4,566,946 4,566,946 6,645,349 Cinven Fund (Fourth), L.P. 2006 194,400,000 157,864,052 41,806,894 Clarity Partners L.P. 2000 203,590,000 204,424,890 113,625,449 Clarity PSERS II, L.P. 2008 17,386,250 11,425,961 562,500 Credit Suisse Equity Partners, L.P. 1998 137,172,500 114,737,213 26,851,583 Credit Suisse Int'l Equity Partners, L.P. 1997 83,000,000 75,537,254 94,200,315 Crestview Partners II (PF) LP 2008 200,000,000 133,195,902 5,991,986 Crestview Partners, L.P. 2005 150,000,000 148,380,811 36,049,940 CS Strategic Partners IV, L.P. 2008 100,000,000 79,951,830 31,266,691 CS Strategic Partners V, L.P. 2011 150,000,000 13,250,357 289,929 CSFB Strategic Partners II, L.P. 2003 300,000,000 261,378,264 435,730,360 CSFB Strategic Partners III-B, L.P. 2005 200,000,000 211,538,819 101,784,122 CVC Capital Partners Asia Pacific III, L.P. 2008 300,000,000 172,202,970 46,662,533 CVC European Equity Partners V (A), L.P. 2008 388,800,000 260,642,561 42,089,863 DLJ Merchant Banking Partners III, L.P. 2000 300,000,000 305,190,754 569,646,767 DLJ Strategic Partners 2001 200,000,000 190,167,557 285,684,631 Dubin Clark Fund II, L.P. 2000 24,083,333 23,685,569 15,278,223 Edgewater Growth Capital Partners, L.P. 2001 59,196,500 58,604,535 63,233,219Edgewater Private Equity Fund III, L.P. 1998 39,000,000 39,000,000 19,533,028 Evergreen Pacific Partners, L.P. 2004 50,000,000 32,275,442 1,807,679

*Includes capital contributions for management fees, late interest, etc. that are not applied to the capital commitments.


Page 60Page 60




*Includes capital contributions for management fees, late interest, etc. that are not applied to the capital commitments.

Partnership NamePrivate Equity (continued):

Vintage Year

Capital Committed


Evergreen Pacific Partners II, L.P. 2008 $ 80,954,545 $ 19,391,482 $ -

First Reserve Fund XI, L.P. 2006 200,000,000 192,514,139 49,499,638 First Reserve Fund XII, L.P. 2008 250,000,000 175,956,410 10,057,098 Furman Selz Investors III L.P. 2000 100,000,000 85,443,338 193,369,077 Graham Partners 1999 56,671,214 60,347,748 50,583,990 Green Equity Investors II 1994 25,000,000 24,151,005 50,916,127 Greenpark International Investors III L.P. 2007 129,600,000 125,304,172 35,674,818 Greenwich Street Capital Partners II 1998 200,000,000 192,779,634 185,083,682 Halifax Capital Partners 1999 50,000,000 39,575,503 54,061,711 Headland Private Equity Fund 6 L.P., The 2008 200,000,000 102,950,733 23,923,124 Incline Equity Partners III (PSERS), L.P. 2011 24,216,667 - - Irving Place Capital Partners II L.P. 2000 300,000,000 281,223,791 381,187,911 Irving Place Capital Partners III L.P. 2006 150,000,000 116,523,038 8,702,301 Jefferies Capital Partners IV, L.P. 2005 100,000,000 80,365,958 (6,917,390)KKR 2006 Fund L.P. 2006 300,000,000 284,654,110 71,104,292 KRG Capital Fund II 2001 100,000,000 79,553,046 115,186,428 KRG Capital Fund III, L.P. 2005 88,000,000 80,779,783 26,862,831 KRG Capital Fund IV L.P. 2007 300,000,000 174,561,376 12,580,331 Landmark Equity Partners III, L.P. 1993 27,085,010 27,085,010 76,154,348 Landmark Equity Partners IV, L.P. 1994 10,533,687 10,242,502 15,305,000 Landmark Equity Partners XIII, L.P. 2006 100,000,000 91,095,300 50,124,310 Landmark Equity Partners XIV, L.P. 2008 150,000,000 57,515,777 12,507,896 Landmark Mezzanine Partners 1995 75,000,000 59,315,512 106,599,975 Lexington Capital Partners I, L.P. 1996 50,000,000 49,613,120 62,882,209 Lindsay Goldberg & Bessemer L.P. 2002 300,000,000 310,118,412 579,017,025 Milestone Partners II, L.P. 2004 29,890,000 26,375,867 33,456,236 Milestone Partners III, L.P. 2008 60,000,000 50,696,300 1,814,905 Milestone Partners IV, L.P. 2011 24,289,655 7,387,517 - Morgan Stanley Dean Witter Cap Ptrs IV, L.P. 1998 300,000,000 227,851,338 451,687,488 Navis Asia Fund V, L.P. 2007 100,000,000 109,160,256 27,812,924 New Mountain Partners III L.P. 2007 300,000,000 202,541,398 43,242,492 New Mountain Partners L.P. 2000 192,509,033 161,272,026 220,235,427New York Life Capital Partners I, L.P. 1999 200,000,000 204,678,699 193,349,617 New York Life Capital Partners II, L.P. 2001 200,000,000 193,279,467 465,475,498 New York Life Capital Partners III-A, L.P. 2005 200,000,000 201,897,535 32,748,274 New York Life Capital Partners IV-A. L.P. 2008 100,000,000 80,625,633 7,891,192 NGP Natural Resources X, L.P. 2012 100,000,000 - - Nordic Capital VII Beta L.P. 2008 194,400,000 132,000,076 2,674,699


Page 61




*Includes capital contributions for management fees, late interest, etc. that are not applied to the capital commitments.Numbers may not add due to rounding.

Partnership NamePrivate Equity (continued):

Vintage Year

Capital Committed


Orchid Asia V, L.P. 2011 $ 40,000,000 $ 5,185,973 $ -

PAI Europe III, L.P. 2001 388,800,000 333,547,528 1,064,878,898 PAI Europe IV-B2, L.P. 2005 129,600,000 124,838,417 122,512,443 PAI Europe V, L.P. 2007 129,600,000 95,936,978 (12,048)Palladium Equity Partners II-A, L.P. 2000 57,750,000 61,770,514 40,822,260 Partners Group Secondary 2008, L.P. 2007 194,400,000 166,349,630 25,222,237 Permira IV, L.P. 2006 162,000,000 141,356,168 13,486,786 Platinum Equity Capital Partners - A, L.P. 2004 125,000,000 97,431,167 214,632,622 Platinum Equity Capital Partners-A II, L.P. 2007 300,000,000 269,303,547 96,045,869 PNC Equity Partners II, L.P. 2006 68,065,386 52,293,057 14,943,263 PNC Equity Partners, L.P. 2001 43,154,458 39,308,591 71,004,272 Providence Equity Partners VI, L.P. 2006 300,000,000 280,810,477 42,571,707 Quadrangle Capital Partners II, L.P. 2005 250,000,000 208,281,759 68,776,899

Quadrangle Capital Partners, L.P. 2001 270,422,415 222,477,734 318,688,355

Sterling Capital Partners, L.P. 2002 75,000,000 84,229,630 124,548,732

TPG Partners II, L.P. 1997 50,000,000 53,854,393 91,361,723

TPG Partners V, L.P. 2006 250,000,000 254,565,228 64,410,006

TPG Partners VI, L.P. 2008 360,000,000 241,518,112 35,992,069 Trilantic Capital Partners IV L.P. 2007 76,752,676 62,252,912 24,906,174 U.S. Equity Partners II 2001 300,000,000 222,012,175 202,215,242

Wicks Communications and Media Partners, L.P. 1999 87,500,000 88,878,287 104,929,461 Willis Stein & Partners, L.P. 1996 25,000,000 25,000,000 53,576,381 Total Private Equity $15,408,977,805 $12,465,665,125 $10,171,214,154


Page 62Page 62




Partnership NameVenture Capital

Vintage Year

Capital Committed


Adams Capital Management, L.P. 1997 $ 12,500,000 $ 12,500,000 $ 22,671,838Aisling Capital II L.P. 2006 50,000,000 45,165,190 9,445,447Aisling Capital III, L.P. 2008 50,000,000 14,373,375 - Co-Investment 2000 Fund, L.P. 2000 135,000,000 135,000,000 157,534,552 Co-Investment Fund II, L.P. 2006 135,000,000 106,650,000 - Cross Atlantic Technology Fund II 2001 21,119,734 21,119,734 12,114,382 Cross Atlantic Technology Fund, L.P. 1999 30,141,666 30,141,667 32,521,161 CS Strategic Partners IV VC, L.P. 2008 50,000,000 50,512,470 10,894,657 CSFB Strategic Partners III-VC, L.P. 2005 50,000,000 50,226,294 30,156,862 Franklin Capital Partners III 1995 15,000,000 15,000,000 12,611,460 Jefferson Partners Fund IV (PA) L.P. 2003 28,700,187 24,176,870 200,195 KBL Healthcare Ventures 1999 13,593,334 13,593,333 6,563,009 Landmark Equity Partners II, L.P. 1992 25,000,000 25,000,000 39,039,687 Landmark Equity Partners V, L.P. 1995 49,060,283 48,478,943 58,700,790 LLR Equity Partners II, L.P. 2004 75,000,000 75,000,000 54,407,799 LLR Equity Partners III, L.P. 2008 187,500,000 122,498,631 31,875,441 LLR Equity Partners, L.P. 1999 62,500,000 61,250,000 129,535,601 NEPA Venture Fund II 1992 5,000,000 5,000,000 23,252,576 Novitas Capital, L.P. 1998 30,000,000 29,922,000 32,767,641 Novitas Capital II, L.P. 2000 75,000,000 74,400,000 15,330,009 P/A Fund 1993 30,000,000 30,000,000 66,195,394 Perseus-Soros BioPharmaceutical Fund 2001 112,206,666 104,211,563 156,937,995 Psilos Group Partners III, L.P. 2007 62,500,000 49,374,999 2,615,688 Quaker BioVentures II, L.P. 2007 100,000,000 53,999,125 9,575,528 Quaker Bio-Ventures, L.P. 2003 69,350,000 69,350,000 13,712,630 SCP Private Equity Partners I, L.P. 1996 62,500,000 62,500,000 42,080,342 SCP Private Equity Partners II, L.P. 2000 125,000,000 125,887,548 24,134,558 StarVest Partners , L.P. 1999 67,500,000 65,649,343 62,498,699 StarVest Partners II (Parallel), L.P. 2007 50,000,000 25,160,384 201,996Sterling Venture Partners, L.P. 2000 33,986,000 35,554,923 30,643,349 TDH III, L.P. 1993 7,350,750 7,350,750 4,780,305 Tenaya Capital IV-P, L.P. 2003 75,000,000 71,642,910 47,461,790 Tenaya Capital V-P, L.P. 2007 75,000,000 56,671,018 16,106,537 TL Ventures III, L.P.. 1997 50,000,000 50,000,000 69,241,353Total Venture Capital $ 2,020,508,620 $ 1,767,361,070 $ 1,225,809,273



Page 63





Partnership NamePrivate Debt:

Vintage Year

Capital Committed


Avenue Asia Special Situations Fund II, L.P. 2001 $ 220,000,000 $ 220,000,000 $ 385,951,359Avenue Asia Special Situations Fund III, L.P. 2003 100,000,000 76,892,230 73,629,536 Avenue Asia Special Situations Fund IV, LP 2006 300,000,000 224,960,884 97,387,672 Avenue Europe Special Situations Fund, L.P. 2008 259,200,000 260,544,328 244,763,790 Avenue Special Situations Fund III, L.P. 2002 205,156,000 151,715,376 258,577,487 Avenue Special Situations Fund IV, L.P. 2005 115,000,000 144,782,669 175,164,641 Avenue Special Situations Fund V, L.P. 2007 300,000,000 300,000,000 365,316,733 Avenue Special Situations Fund VI, L.P. 2011 75,000,000 60,531,650 (1,892,726)Cerberus Institutional Partners, L.P. (Series 2) 2001 200,000,000 172,004,532 423,486,798 Cerberus Institutional Partners, L.P. (Series 3) 2003 100,000,000 81,000,000 82,508,005 Cerberus Institutional Partners, L.P. (Series 4) 2006 400,000,000 369,377,151 15,795,948 Gleacher Mezzanine Fund II, L.P. 2006 100,000,000 67,254,246 27,240,936 Gleacher Mezzanine Fund, L.P. 2001 75,000,000 63,450,304 95,306,111 Gold Hill Venture Lending 03-A, L.P. 2004 50,000,000 50,000,000 50,079,483 GSC Partners CDO Investors IV, L.P. 2003 80,000,000 80,000,000 80,000,000 GSC Recovery II, L.P. 2000 280,000,000 279,170,771 366,857,421 GSC Recovery III (Parallel Fund), L.P. 2005 200,000,000 199,461,456 121,355,326 NYLIM Mezzanine Partners (Parallel Fund) L.P. 2003 75,000,000 66,762,905 77,535,594 NYLIM Mezzanine Partners II (Parallel Fund) LP 2006 150,000,000 161,433,929 113,672,075 OCM Opportunities Fund VII L.P. 2007 75,000,000 75,000,000 41,669,310 OCM Opportunities Fund VII-b L.P. 2008 225,000,000 202,500,000 138,712,500 Versa Capital Fund I, L.P. 2005 75,000,000 79,875,000 52,363,350 Versa Capital Fund II, L.P. 2008 150,000,000 56,250,000 2,016,831 Windjammer Senior Equity Fund III, L.P. 2006 50,000,000 39,173,566 26,855,445Total Private Debt $ 3,859,356,000 $ 3,482,140,997 $ 3,314,353,626

Grand Total $21,288,842,425 $17,715,167,192 $14,711,377,052


Page 64Page 64


Summary of PSERS’ Cash Investments


Cash represents one of eight major asset classes that PSERS uses to diversify the investments of the Fund.

PSERS assigned one internal investment manager to management of the cash portfolio.

Policy

Cash investments are utilized by the Fund primarily to provide sufficient liquidity to meet its obligation to pay member benefits and capital commitments to private market and real estate investments. Cash investments are targeted to be 100% actively managed.

PSERS’ Asset Allocation currently targets an allocation of 5.0% of assets to Cash investments.


Number of External Investment Managers: One.

Number of Internal Investment Managers: PSERS had one employee managing a cash portfolio.


Cash Market Value (in millions)

% of Total Cash

% of Total Fund

Internally Managed Portfolio PSERS Proprietary Fund $ 2,185.4 76.4% 4.7%

Externally Managed Portfolio Bridgewater Associates, Inc. 675.3 23.6% 1.4%

Total Cash $ 2,860.7 100.0% 6.1%

Summary of PSERS’ Cash Portfolios (unaudited)




Page 65


Summary of Investment Advisory FeesFiscal Year Ended June 30, 2011


FeesBasis Points

External Management

U.S. Equity $ 4,926 56Non - U.S. Equity 30,002 60Fixed Income 65,444 83Commodities 16,610 71Absolute Return 138,931 199Real Estate 87,293 103Alternative Investments 156,980 105

Total External Management 500,186 107

Total Internal Management 9,790 6

Total Investment Management $ 509,976 82

Custodian Fees 600 Consultant and Legal Fees 4,119

Total Investment Expenses $ 514,695 83

Investment Advisory FeesFiscal Years Ended June 30, 2006 - 2010


Fiscal Year Fees

Basis Points

2006 211,279 352007 313,758 412008 399,136 472009 477,565 70

2010 522,315 82


Page 66Page 66


Investment Managers’ Fees Fiscal Year Ended June 30, 2011


Manager Location Amount

U.S. EquityAH Lisanti Capital Growth, L.L.C. New York NY $ 197 Ativo Capital Management, L.L.C. Chicago IL 100 Biondo Group, L.L.C. (The) Milford PA 26 Conestoga Capital Advisors, Inc. Radnor PA 252 Donald Smith & Co., Inc. New York NY 140 EDMP, Inc. Tampa FL 167 Emerald Advisors, Inc. Lancaster PA 15 First Pacific Advisors, Inc. Los Angeles CA 1,798 Hanseatic Management Services, Inc. Albuquerque NM 40 Harvest Fund Advisors, L.L.C. Wayne PA 620 Hellman, Jordan Management Company, Inc. Boston MA 160 NorthPointe Capital, L.L.C. Troy MI 651 Oberweis Asset Management, Inc. North Aurora IL 209 Opus Capital Management, Inc. Cincinnati OH 233 Thomson Horstmann & Bryant, Inc. Saddle Brook NJ 178 Turner Investment Partners, Inc. Berwyn PA 140 Total - U.S. Equity 4,926

Non - U.S. EquityAcadian Asset Management Boston MA 751Baillie Gifford Overseas Ltd. Edinburgh UK 2,662 Batterymarch Financial Management, Inc. Boston MA 1,479 BlackRock Financial Management, Inc. Boston MA 11,654 Boston Company Asset Management, L.L.C. Boston MA 316 GlobeFlex Capital, L.P. San Diego CA 120 John Hsu Capital Group, Inc. New York NY 304 Marathon Asset Management Limited London UK 1,536 Martin Currie, Inc. Edinburgh UK 277 Mercator Asset Management, L.P. Ft. Lauderdale FL 315 Munder Capital Management Birmingham MI 132 Oberweis Asset Management, Inc. North Aurora IL 837

External Management fees are treated as a reduction of the investment revenue of the Fund rather than as a budgeted administrative expense.


Page 67



(Dollar Amounts in Thousands)(continued)


Non - U.S. Equity (continued)Pareto Investment Management, Ltd. New York NY $ 1,851Pyramis Global Advisors Boston MA 944 Shah Capital Management, Inc. Raleigh NC 929 Templeton Investment Counsel, Inc. Nassau Bahamas 570 Wasatch Advisors, Inc. Salt Lake City UT 3,339Wellington Management Company, L.L.P. Boston MA 1,100Westwood Global Investments, L.L.C. Boston MA 597William Blair & Company, L.L.C. Chicago IL 289 Total - Non - U.S. Equity 30,002

Fixed IncomeAberdeen Asset Management, Inc. Philadelphia PA 415 BlackRock Financial Management, Inc. New York NY 11,077 BlackRock Mortgage (Offshore) Investors, L.P. New York NY 5,000 Bridgewater Associates, Inc. Westport CT 12,758 Brookfield Asset Management, Inc. New York NY 3,001 Fischer Francis Trees & Watts, Inc. New York NY 388 Franklin Templeton Investments Nassau Bahamas 2,293 LBC Credit Partners II, L.P. Philadelphia PA 4,874 MacKay-Shields Financial Corporation New York NY 1,573 Mariner Investment Group Harrison NY 5,821 Oaktree Loan Fund, L.P. Los Angeles CA 1,520 Pacific Investment Management Company (PIMCO) Newport Beach CA 729 Piedmont Investment Advisors Durham NC 116 Pugh Capital Management, Inc. Seattle WA 69 Rogge Global Partners London UK 460 Sankaty Advisors, L.L.C. Wilmington DE 2,939 Sankaty Credit Opportunities IV, L.P. Wilmington DE 9,229 Sankaty Middle Markets Opportunity Fund Wilmington DE 348 Stone Harbor Investment Partners, L.P. New York NY 2,300 TCW Credit Opportunities Fund, L.P. Dover DE 15 Western Asset Management Company Pasadena CA 519 Total - Fixed Income 65,444


Page 68Page 68





CommoditiesCredit Suisse Asset Management, L.L.C. New York NY $ 636 Deutsche Asset Management Americas, Inc. New York NY 3,619 Neuberger Berman Alternative Fund Mgmt., L.L.C. New York NY 3,047 Schroder Investment Management North America, Inc. New York NY 3,478 Wellington Management Company, L.L.P. Boston MA 5,830 Total - Commodities 16,610

Absolute ReturnAcorn Derivatives Management Corporation White Plains NY 397 AQR Capital Management, L.L.C. Greenwich CT 12,476 BlackRock Financial Management, Inc. San Francisco CA 24,944 Boston Company Asset Management, L.L.C. Boston MA 3,922 Brevan Howard Fund, Ltd. George Town Cayman Islands 8,108 Bridgewater Associates, Inc. Westport CT 22,006 Brigade Capital Management, L.L.C. New York NY 23,516 Capula Investment Management, L.L.P. London UK 2,610 Caspian Capital Advisors, L.L.C. New York NY 1,137 Denali Advisors, L.L.C. San Diego CA 323 First Quadrant, L.P. Greenwich CT 1,927 FX Concepts, Inc. New York NY 4,000 Lazard Asset Management New York NY 2,987 Pacific Investment Management Company (PIMCO) Newport Beach CA 27,232 Pareto Investment Management, Ltd. London UK 3,200 Zacks Investment Management Chicago IL 146 Total - Absolute Return 138,931

Real Estate-Publicly TradedMorgan Stanley Investment Management, Inc. New York NY 14 Subtotal - Real Estate-Publicly Traded 14


Page 69





Real Estate-Direct OwnershipCharter Oak Advisors, Inc. King of Prussia PA $ 753 GF Management, Inc. Philadelphia PA 131 Grandbridge Real Estate Capital, L.L.C. Charlotte NC 3 Grosvenor Investment Management U.S., Inc. Philadelphia PA 21 L & B Realty Advisors, L.L.P. Dallas TX 41 Subtotal - Real Estate-Direct Ownership 949

Real Estate-Partnerships/FundsApollo European Real Estate Fund III, L.P. Purchase NY 1,723 Apollo Real Estate Finance Corporation New York NY 1,614 Apollo Value Enhancement Fund VII, L.P. Purchase NY 6,911 AREFIN Co-Invest Corporation New York NY 349 AvalonBay Value Added Fund, L.P. Alexandria VA 883 AvalonBay Value Added Fund II, L.P. Alexandria VA 416 Avenue Real Estate Fund Parallel, L.P. New York NY 1,250 Beacon Capital Strategic Partners V, L.P. Boston MA 2,338 Berwind Investment Partnership V, L.P. Philadelphia PA 176 Berwind Investment Partnership VI, L.P. Philadelphia PA 331 Blackstone Real Estate Partners Europe III, L.P. New York NY 3,471 Blackstone Real Estate Partners V.TE.1, L.P. New York NY 1,951 Blackstone Real Estate Partners VI.TE.1, L.P. New York NY 4,971 BPG Co-Investment Partnership, L.P. Philadelphia PA 188 Broadway Partners Parallel Fund P II, L.P. New York NY 542 Broadway Partners Parallel Fund P III, L.P. New York NY 618 Cabot Industrial Value Fund III, L.P. Boston MA 1,612 Carlyle Europe Real Estate Partners III-A, L.P. Washington DC 2,144 Carlyle Realty Partners III, L.P. Washington DC 162 Carlyle Realty Partners IV, L.P. Washington DC 1,102 Carlyle Realty Partners V, L.P. Washington DC 2,875 Cornerstone Patriot Fund, L.P. Hartford CT 635 CS Strategic Partners IV RE, L.P. New York NY 563 CSFB Strategic Partners II RE, L.P. New York NY 146 CSFB Strategic Partners III RE, L.P. New York NY 41 DLJ Real Estate Capital Partners II, L.P. New York NY 220


Page 70Page 70




( ) Represents reversal of amount accrued in prior fiscal year.


Real Estate-Partnerships/Funds (continued)DLJ Real Estate Capital Partners III, L.P. New York NY $ 1,136 DLJ Real Estate Capital Partners IV, L.P. New York NY 3,125 DRA Growth and Income Fund VI, L.P. New York NY 2,511 Fillmore West Fund, L.P. San Francisco CA 865 Five Arrows Realty Securities V, L.P. New York NY 420 Fortress Investment Fund IV, L.P. New York NY 697 Fortress Investment Fund V (Fund A), L.P. New York NY 1,995 Hines U.S. Office Value Added Fund, L.P. Houston TX 519 JPMCB Strategic Property Fund New York NY 177 LCCG High Yield CMBS Fund III, L.L.C. Irving TX (44)LCCG RE Special Situations Mortgage Fund, L.L.C. Irving TX (335)Legg Mason Real Estate Capital, Inc. Los Angeles CA 126 Legg Mason Real Estate Capital II, Inc. Los Angeles CA 1,212 LEM Real Estate Mezzanine Fund II, L.P. Philadelphia PA 938 LF Strategic Realty Investors II, L.L.C. New York NY 823 Lubert-Adler Real Estate Fund II, L.P. Philadelphia PA 18 Lubert-Adler Real Estate Fund IV, L.P. Philadelphia PA 1,462 Lubert-Adler Real Estate Fund V, L.P. Philadelphia PA 1,136 Lubert-Adler Real Estate Fund VI, L.P. Philadelphia PA 3,091 Madison Marquette Retail Enhancement Fund, L.P. Washington DC 768 MGPA Asia Fund III, L.P. Hamilton Bermuda 2,083 MGPA Europe Fund III, L.P. London UK 1,928 Morgan Stanley Real Estate Fund IV Special Dom., L.P. New York NY 122 Morgan Stanley Real Estate Fund IV Special Int'l, L.P. New York NY 233 Morgan Stanley Real Estate Fund V Special Int'l, L.P. New York NY 826 Morgan Stanley Real Estate Fund V Special U.S., L.P. New York NY 140 Morgan Stanley Real Estate Fund VI Special Int'l, L.P. New York NY 2,335 Morgan Stanley Real Estate Fund VII Global, L.P. New York NY 512 O' Connor North American Property Partners, L.P. New York NY 1,072 O' Connor North American Property Partners II, L.P. New York NY 1,599 Paladin Realty Latin America Investors III, L.P. Los Angeles CA 1,678 Peabody Global Real Estate Partners, L.P. New York NY 36 Prime Property Fund, L.L.C. New York NY 397 PRISA Parsippany NJ 689 ProLogis North American Industrial Fund, L.P. Denver CO 1,670 RCG Longview Debt Fund IV, L.P. New York NY 2,063


Page 71





Real Estate-Partnerships/Funds (continued)RCG Longview Equity Fund, L.P. New York NY $ 591RREEF America REIT II, Inc. Chicago IL 31 Silverpeak Legacy Pension Partners II, L.P. New York NY 1,554 Silverpeak Legacy Pension Partners III, L.P. New York NY 1,212 Silverpeak/PSERS Real Estate, L.P. New York NY 660 Stockbridge Real Estate Fund, L.P. New York NY 2,090 Stockbridge Real Estate Fund II, L.P. New York NY 1,111 Stockbridge Real Estate Fund III, L.P. New York NY 1,877 Strategic Partners Value Enhancement Fund, L.P. Los Angeles CA 752 UBS (US) Trumbull Property Fund, L.P. Hartford CT 632 Whitehall Street Real Estate L.P. VII &VIII New York NY 10 William E. Simon & Sons Realty Partners, L.P. Los Angeles CA 373 Subtotal - Real Estate-Partnerships/Funds 86,148

Real Estate-FarmlandPrudential Agricultural Group Lisle IL 182 Subtotal - Real Estate-Farmland 182

Total Real Estate 87,293

Private EquityABS Capital Partners II, L.P. Baltimore MD 9 Actis Emerging Markets 3, L.P. London UK 4,000 Allegheny New Mountain Partners, L.P. New York NY 494 Apax Europe VII-B, L.P. St. Peter Port Guernsey 2,918 Baring Asia Private Equity Fund III, L.P. Hong Kong China 2,149 Baring Asia Private Equity Fund IV, L.P. Hong Kong China 6,098 Baring Asia Private Equity Fund V, L.P. Hong Kong China 2,333 Blue Point Capital Partners II (B), L.P. Cleveland OH 784 Bridgepoint Europe II-A, L.P. London UK 1,131 Bridgepoint Europe III-A, L.P. London UK 1,826 Bridgepoint Europe IV, L.P. London UK 5,533 Capital International Private Equity Fund V, L.P. San Francisco CA 2,238 Capital International Private Equity Fund VI, L.P. San Francisco CA 125 Catterton Growth Partners, L.P. Greenwich CT 1,049 Catterton Partners V, L.P. Greenwich CT 882


Page 72Page 72





Private Equity (continued)Catterton Partners VI, L.P. Greenwich CT $ 1,917 Cinven Fund (Fourth), L.P. (The) London UK 2,341 Clarity Partners, L.P. Beverly Hills CA 1,463 Clarity Partners II, L.P. Beverly Hills CA 348 Credit Suisse First Boston Equity Partners, L.P. New York NY 65 Credit Suisse First Boston Int'l Equity Partners, L.P. New York NY 6 Crestview Capital Partners, L.P. New York NY 1,915 Crestview Partners II (PF), L.P. New York NY 3,459 CS Strategic Partners IV, L.P. New York NY 750 CSFB Strategic Partners II, L.P. New York NY 779 CSFB Strategic Partners III-B, L.P. New York NY 500 CVC Capital Partners Asia III Pacific, L.P. George Town Cayman Islands 3,416 CVC European Equity Partners V (A), L.P. George Town Cayman Islands 3,879 DLJ Merchant Banking Partners III, L.P. New York NY 379 DLJ Strategic Partners, L.P. New York NY 500 Edgewater Growth Capital Partners, L.P. Chicago IL 153 Edgewater Private Equity Fund III, L.P. Chicago IL 189 Evergreen Pacific Partners, L.P. Seattle WA 86 Evergreen Pacific Partners II, L.P. Seattle WA 1,186 First Reserve Fund XI, L.P. Greenwich CT 1,253 First Reserve Fund XII, L.P. Greenwich CT 3,027 Graham Partners Investments (B), L.P. Newtown Square PA 120 Greenpark International Investors III, L.P. London UK 1,285 Greenwich Street Capital Partners II, L.P. New York NY 15 Halifax Capital Partners, L.P Wilmington DE 28 Headland Private Equity Fund 6, L.P. George Town Cayman Islands 3,460 Irving Place Capital Partners III, L.P. New York NY 2,032 Jefferies Capital Partners IV, L.P. New York NY 836 KKR 2006 Fund, L.P. New York NY 2,938 Landmark Equity Partners XIII, L.P. Simsbury CT 1,000 Landmark Equity Partners XIV, L.P. Simsbury CT 1,396 Landmark Mezzanine Partners, L.P. Simsbury CT 11 Lindsay Goldberg & Bessemer, L.P. New York NY 571 Milestone Partners III, L.P. Rosemont PA 637 Morgan Stanley Dean Witter Capital Partners IV, L.P. New York NY 189 Navis Asia Fund V, L.P. Kuala Lumpur Malaysia 1,462


Page 73





Private Equity (continued)New Mountain Partners, L.P. New York NY $ 192 New Mountain Partners III, L.P. New York NY 4,060 New York Life Capital Partners, L.P. New York NY 245 New York Life Capital Partners II, L.P. New York NY 550 New York Life Capital Partners III, L.P. New York NY 2,000 New York Life Capital Partners IV, L.P. New York NY 1,000 Nordic Capital VII Beta L.P. St. Helier Guernsey 3,227 PAI Europe III, L.P. Paris France 906 PAI Europe IV, L.P. Paris France 1,147 PAI Europe V, L.P. St. Peter Port Guernsey 1,960 Palladium Equity Partners II-A, L.L.C. New York NY 87 Partners Group Secondary 2008, L.P. St. Peter Port Guernsey 2,610 Permira IV, L.P. London UK 2,297 PNC Equity Partners, L.P. Pittsburgh PA 59 PNC Equity Partners II, L.P. Pittsburgh PA 170 Providence Equity Partners VI, L.P. Providence RI 1,534 Quadrangle Capital Partners, L.P. New York NY 575 Quadrangle Capital Partners II, L.P. New York NY 2,359 Sterling Capital Partners, L.P. Northbrook IL 540 TPG Partners V, L.P. Fort Worth TX 788 TPG Partners VI, L.P. Fort Worth TX 2,797 Trilantic Capital Partners IV, L.P. New York NY 1,153 US Equity Partners II, L.P. New York NY 822 Wicks Communications & Media Partners L.P. New York NY 467 Subtotal - Private Equity 106,705

Private DebtAvenue Asia Special Situations Fund III, L.P. New York NY 157 Avenue Asia Special Situations Fund IV, L.P. New York NY 3,581Avenue Europe Special Situations Fund, L.P. New York NY 4,176 Avenue Special Situations Fund IV, L.P. New York NY 555 Avenue Special Situations Fund V, L.P. New York NY 3,071 Avenue Special Situations Fund VI, L.P. New York NY 224 Cerberus Institutional Partners, L.P. (Series Two) New York NY 306


Page 74Page 74





Private Debt (continued)Cerberus Institutional Partners, L.P. (Series Three) New York NY $ 627 Cerberus Institutional Partners, L.P. (Series Four) New York NY 5,615 Gleacher Mezzanine Fund, L.P. New York NY 57 Gleacher Mezzanine Fund II, L.P. New York NY 1,320 Gold Hill Venture Lending 03-A, L.P. Santa Clara CA 218 GSC Partners CDO Investors IV, L.P. New York NY 1,302 GSC Recovery III, L.P. New York NY 1,611 NYLIM Mezzanine Partners Parallel Fund, L.P. New York NY 198 NYLIM Mezzanine Partners Parallel Fund II, L.P. New York NY 1,875 OCM Opportunities Fund VII, L.P. Los Angeles CA 1,047 OCM Opportunities Fund VII-B, L.P. Los Angeles CA 3,293 Versa Capital Fund, L.P. Philadelphia PA 1,097 Versa Capital Fund II, L.P. Philadelphia PA 831Windjammer Senior Equity Fund III, L.P. Newport Beach CA 582 Subtotal - Private Debt 31,743

Venture CapitalAisling Capital II, L.P. New York NY 564 Aisling Capital III, L.P. New York NY 916 Co-Investment 2000 Fund, L.P. (The) Radnor PA 239 Co-Investment Fund II, L.P. (The) Radnor PA 1,341 Cross Atlantic Technology Fund, L.P. Radnor PA 61 Cross Atlantic Technology Fund II, L.P. Radnor PA 71 CS Strategic Partners IV VC, L.P. New York NY 375 CSFB Strategic Partners III-VC, L.P. New York NY 333 Franklin Capital Associates III, L.P. Franklin TN 66 Jefferson Partners Fund IV, L.P. Toronto Canada 414 KBL Partnership, L.P. New York NY 195 LLR Equity Partners, L.P. Philadelphia PA 233 LLR Equity Partners II, L.P. Philadelphia PA 903 LLR Equity Partners III, L.P. Philadelphia PA 3,282 Novitas Capital, L.P. Wayne PA 115 Perseus-Soros BioPharmaceutical Fund, L.P. New York NY 514 Psilos Group Partners III, L.P. New York NY 1,116 Quaker BioVentures, L.P. Philadelphia PA 1,243 Quaker BioVentures II, L.P. Philadelphia PA 1,989


Page 75




*Internal Management fees include salaries and fringe benefits of $4,490 and operating expenses of $5,300.



Venture Capital (continued)SCP Private Equity Partners II, L.P. Wayne PA $ 1,031 Starvest Partners II, L.P. New York NY 1,288 Sterling Venture Partners, L.P. Baltimore MD 243 Tenaya Capital IV-P, L.P. New York NY 687 Tenaya Capital V-P, LP New York NY 1,313 Subtotal - Venture Capital 18,532

Total Alternative Investments 156,980

Total External Management 500,186

Total Internal Management 9,790 *

Total Investment Management $ 509,976


Page 76Page 76




Page 77


Internal Equity Trading Desk

One of the benefits of managing a significant amount of assets internally is that PSERS can have its own

trading desk. A majority of the U.S. equity trades for the Fund are executed by PSERS’ internal trading desk. The internal U.S. equity managers as well as a number of the external U.S. equity managers utilize the trading desk to execute trades. The objectives of PSERS’ internal trading desk include:

• to obtain best execution;• to pay the lowest possible commissions consistent

with obtaining best execution; and• to provide market information/data to portfolio

managers

The trading desk provides PSERS with access to information on the markets from sell-side brokers and monitoring business news services which helps in the management of

the investments of the Fund. The trading desk also provides portfolio transition management services to the System. When equity portfolio managers are terminated, the trading desk handles the liquidation of the portfolio or the transition from one portfolio manager to another, minimizing the costs of those transitions.

The order flow generated by the trading desk provides the System with access to initial public offerings (IPOs). This can be a source of incremental returns since most IPOs generally trade higher after being issued. This IPO access generated $1,371,597 in profits for PSERS during the calendar year ending December 31, 2011.

PSERS’ trading desk executed approximately 21,000 U.S. and Non-U.S. orders for the purchase and sale of stock, currency, futures, and options during the fiscal year ended June 30, 2011. The total dollar amount of U.S. and Non-U.S. orders traded during the fiscal year ended June 30, 2011 was approximately $35 billion.



Page 78Page 78




Page 79


PSERS’ Public Market Emerging Investment Manager

(PMEIM) Program(as of December 31, 2011)

The Public Market Emerging Investment Manager (PMEIM) Program is a sub-section of PSERS’ U.S. Equity, Non-U.S. Equity, Absolute Return, and Fixed Income investment classes.

Policy

Consistent with its fiduciary responsibilities, the Board has established the PMEIM Program to:

1. locate and fund managers with successful histories of generating positive alpha with risk commensurate with the alpha generated (positive risk adjusted returns);

2. provide a source of potential managers for the main fund; and

3. assist public market emerging investment management firms grow through the use of the System’s name in the managers’ marketing efforts.

The Board has allocated up to $1 billion to the PMEIM Program. Funding for each investment manager will come from assets allocated within the main fund similar to or most closely related to the investment manager’s mandate. The maximum number of investment managers in the program at any one time shall not exceed 25. The program may run with less than 25 investment managers.

Investment managers desiring to participate in the program must meet the following required criteria:

• Firms must be registered under the Investment Advisors Act of 1940 or be exempt therefrom (and will maintain such registration or exemption);

• Firms must provide transparency of positions and transactions;

• Firms must provide at least monthly liquidity;

• Firms, the portfolio manager, or any combination thereof must have a three-year historical, performance record verified by at least one consultant or accounting firm in accordance with the Global Investment Performance Standards (GIPS);

• Firms must have no more than $1.5 billion of total assets under management when hired (existing investment managers will be terminated within a reasonable period of time from the PMEIM Program when the total assets under management exceeds $3.0 billion); and

• For performance based fee accounts, the managers must have a hurdle rate and they must exceed this rate to earn the performance-based fee.

Preference will be given to investment managers deemed as able to meet the objectives, goals, and required criteria noted above plus having one or more of the following characteristics:

• Pennsylvania investment management firms headquartered or incorporated within the Commonwealth; and/or

• Minority and/or women-owned investment management firms approved by the Office of Minority and Women Business Enterprise in accordance with the criteria established by Executive Order No. 1987-18 and 4 Pennsylvania Code, Section 68.204.

Market Value as of December 31, 2011: $ 743.1 million or 1.6 % of the total market value of the Fund.

Number of External Investment Managers: PSERS had contracts with 14 external investment managers in the PMEIM Program.


PSERS’ PMEIM Investment Managers (Market Value in Millions)

(unaudited, as of December 31, 2011)

External Manager PA-BasedWomen-owned

Minority-owned Other Total

U.S. Equity Large CapHellman, Jordan Management Co., Inc. $ 31.7 $ 31.7EDMP, Inc. $ 46.5 46.5

U.S. Equity Mid and Small CapAH Lisanti Capital Growth, LLC 56.4 56.4Conestoga Capital Advisors, Inc. $ 61.6 61.6Harvest Fund Advisors, LLC 97.7 97.7Opus Capital Management, Inc. $ 61.7 61.7

U.S. Equity Micro CapAtivo Capital Management, Inc. 19.8 19.8

Non-U.S. Equity Large CapJohn Hsu Capital Group, Inc. 66.5 66.5Shah Capital Management, Inc. 39.3 39.3

Non-U.S. Equity Emerging MarketsGlovista Investments 26.1 26.1Westwood Global Investments, LLC 61.0 61.0

U.S. Core Plus Fixed IncomePiedmont Investment Advisors 49.3 49.3Pugh Capital Management, Inc. 86.1 86.1

Absolute ReturnDenali Advisors, LLC 39.4 39.4

Total PSERS’ PMEIM Portfolios $ 159.3 $ 102.9 $ 388.2 $ 92.7.7 $ 743.1

Percentage by category 21.4% 13.9% 52.2% 12.5%

Section 4 - Commitment to Pennsylvania


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Commitment to Pennsylvania-Based Investment Managers(as of December 31, 2011)

The members of the Board and Staff are fiduciaries and must act in the interests of the members of the System

and for the exclusive benefit of the System’s members. In creating the investment program, the Board hires both external investment managers and internal investment managers. The Board has determined that it is in the best interest of the System to manage assets internally when (1) the System’s staff has the proven ability to internally manage portfolios at least as well as the external investment managers, and (2) the cost of investing those assets is no greater than the cost that would have been incurred to have those assets externally managed. The Board will also consider the diversification benefits that may be achieved by allocating assets to external portfolio managers even when conditions (1) and (2) are met.

Pennsylvania-Based Manager Market Value (in millions)

Percentage of the Fund

Internal Management US. Equity: S&P 500 Index $ 3,816.3 8.1% S&P 400 Index 267.6 0.6%

S&P 600 Index 230.2 0.5% Non-U.S. Equity: ACW ex-U.S. Index 3,756.6 8.0% World X-U.S. Small Cap 201.4 0.4% Fixed Income:

PSERS TIPS 1,479.5 3.1% PSERS Active Aggregate 1,251.8 2.7% Cash & Cash Equivalents:

STIF 2,185.4 4.7% Total Internal Management 13,188.8 27.9%

External Management U.S. Equity: Conestoga Capital Advisors 61.6 0.1% Fixed Income: LBC Credit Partners II, LP 154.2 0.3% Real Estate: BPG Co-Investment Partnership, LP 15.6 0.0% BPG Investment Partnership VI, LP 35.2 0.1% BPG Investment Partnership V 16.8 0.0% Charter Oak Advisors, Inc. 112.6 0.2%

The Board evaluates external mangers based on a variety of factors, including, (1) their expected future performance; (2) their investment philosophy and style; (3) their investment process; (4) their personnel; (5) cost; and (6) how their philosophy and style fits in with the existing investment structure. In selecting external managers, PSERS will show preference to Pennsylvania-based potential managers that demonstrate similar strengths to alternative managers without a Pennsylvania nexus.

PSERS has shown a tremendous commitment to Pennsylvania’s financial services industry by having assets managed by firms based in Pennsylvania or by firms with offices in Pennsylvania. The following is a list of both the assets managed internally by PSERS and externally from offices located in Pennsylvania, as of December 31, 2011:


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Commitment to Pennsylvania-Based Investment Managers(as of December 31, 2011)

(continued)

In FY 2011, investment manager fees paid to external firms managing PSERS’ assets from offices located in Pennsylvania amounted to $ 26.8 million, or 5.4% of the total external investment manager fees.

Pennsylvania-Based Manager Market Value (in millions)

Percentage of the Fund

Real Estate (continued)

GF Management, Inc. $ 55.2 0.1% Grosvenor Investment Mgmt. U.S., Inc. 8.4 0.0% LEM Real Estate Mezzanine Fund II, LP 44.7 0.1% Lubert-Adler Real Estate Fund III, LP 8.5 0.0% Lubert-Adler Real Estate Fund IV, LP 19.7 0.0% Lubert-Adler Real Estate Fund V, LP 31.4 0.1% Lubert-Adler Real Estate Fund VI, LP 55.8 0.1% Private Equity and Debt: Graham Partners, LP 22.7 0.0% Milestone Partners II, LP 18.2 0.0% Milestone Partners III, LP 58.6 0.1% Milestone Partners IV, LP 7.4 0.0% PNC Equity Partners I, LP 4.8 0.0% PNC Equity Partners II, LP 44.2 0.1% Versa Capital Fund I, LP 96.2 0.2% Versa Capital Fund II, LP 66.5 0.1% Venture Capital: Adams Capital Management, LP 1.9 0.0% Co-Investment Fund 2000, LP 50.2 0.1% Co-Investment Fund II, LP 70.9 0.2% Cross Atlantic Technology Fund, LP 6.0 0.0% Cross Atlantic Technology Fund II, LP 9.0 0.0% LLR Equity Partners, LP 5.9 0.0% LLR Equity Partners II, LP 41.6 0.1% LLR Equity Partners III, LP 88.1 0.2% NEPA Venture Fund II, LP 1.2 0.0% Novitas Capital, LP 5.5 0.0% Novitas Capital II, LP 3.3 0.0% P/A Fund, LP 0.6 0.0% Quaker BioVentures, LP 19.9 0.0% Quaker BioVentures II, LP 36.9 0.1% SCP Private Equity Partners, LP 0.3 0.0% SCP Private Equity Partners II, LP 66.8 0.1% TDH III, LP 0.2 0.0% Total External Management 1,346.6 2.9%

Total Investment Portfolios Managed in PA $ 14,535.4 30.8%


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Summary of Investments in Pennsylvania


Where investment characteristics including yield, risk, and liquidity are equivalent, the Board’s policy favors

investments that have a positive impact on the economy of Pennsylvania. The Board, in managing the investment portfolio, will also be cognizant of concentration risk to any one region, including Pennsylvania. The Fund will continue to seek investments in Pennsylvania-based companies when the investment characteristics are equivalent to other favorable investments, subject to diversification considerations.

The following is a table of Pennsylvania-based investments and other statistics at December 31, 2011 ($’s in millions):

and a Co-Investment Fund) managed by BPG Properties, Ltd., located in Philadelphia. PSERS has committed $550 million in five funds (Lubert-Adler Funds II, III, IV, V and VI) managed by Lubert-Adler, another Pennsylvania-based real estate manager. Finally, PSERS has committed $75 million in one fund (LEM Real Estate Mezzanine Fund II) managed by LEM Mezzanine Partners, located in Philadelphia.

As of December 31, 2011, PSERS’ Pennsylvania real estate portfolio contained 52.8 million square feet of office, retail, and warehouse space and 35,653 apartment, hotel and condominium units. The gross market value of the Pennsylvania real estate portfolio investments totaled $3.1 billion, of which PSERS’ ownership share was $209.4 million. The portfolio contains numerous notable Pennsylvania real estate investments, including:

Asset Class

Total PA Market Value (PSERS' Portion)

Total PA Market Value

(Total Invested)# of People Employed Payroll

U.S. Equities $ 98.8 $ 98.8 * $ * Fixed Income 54.9 54.9 * * Private Real Estate 209.4 3,060.5 1,780 45.5Private Markets: Venture Capital 93.9 425.4 5,520 273.7 Private Equity 923.6 22,396.1 30,983 1,004.9 Private Debt 259.1 4,642.5 10,964 553.3 Total $ 1,639.7 $ 30,678.2 49,247 $ 1,877.4

* Statistics for publicly traded companies not included due to the difficulty in obtaining the information.

U.S. EquitiesPSERS invests in the stock of Pennsylvania-based companies through the various U.S. Equity portfolios managed by external and internal portfolio managers. PSERS has always had substantial investments in large national firms located in Pennsylvania, a list of which is included later in this section.

Fixed Income SecuritiesPSERS invests in the debt of Pennsylvania-based companies through the various Fixed Income portfolios managed by external and internal portfolio managers. PSERS has always had substantial investments in large national firms located in Pennsylvania, a list of which is included later in this section.

Private Real EstatePSERS has investments in limited partnerships that have invested in Pennsylvania real estate properties. PSERS has committed $207.5 million in three funds (Fund V, Fund VI,

• 5 North Fifth Street - PSERS owns a 100% interest in this major downtown Harrisburg, PA, office building that contains 70,693 square feet of office space. The building is PSERS’ headquarters and is fully occupied by PSERS.

• Brixmor - Blackstone Real Estate Partners VI made an investment in a nationwide portfolio of neighborhood shopping centers, comprising over 90 million square feet of gross leasable area in 39 states. There are approximately 40 centers comprising over 6.75 million square feet of this portfolio located in Pennsylvania.

• The National at Old City – This condominium complex is located in Philadelphia, PA. The National at Old City consists of 153 units and contains 208,919 square feet of condominium space. This investment was made by SilverPeak Legacy Partners II.

• Kenmawr – This investment is a part of a long-term joint venture relationship between Lubert-Adler and Philadelphia Management and Companies


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(PMC) that specializes in adaptive re-use of vacant buildings into stable, high quality rental apartments within and outside of Pennsylvania. The Kenmawr investment is located in Pittsburgh, PA and consists of 206 apartment units and 44 commercial units. The Kenmawr investment was made in Lubert-Adler Real Estate Funds V and VI.

• Brandywine Office Portfolio – The Brandywine Office Portfolio consists of 29 properties totaling 1.6 million square feet and is located in the Lehigh Valley. This investment was made by DRA Growth and Income Fund VI.

Venture CapitalPSERS’ Venture Capital program has committed $2.2 billion to 50 partnerships since the inception of the program. In addition to the current international scope of venture capital investments, a historical objective of this program has been to target partnerships that demonstrate an ability to invest in Pennsylvania-based companies. Selected partnerships offer diversification according to geographic region and financing stage within Pennsylvania. From the inception of this program to December 31, 2011, 27 of the 50 venture capital partnerships were headquartered in Pennsylvania.

PSERS’ is generally the lead investor in many of the venture capital funds in which PSERS invests. As a lead investor, PSERS provides Pennsylvania with capital from numerous out-of-state investors. As of December 31, 2011, PSERS’ Venture Capital partnerships invested in 132 Pennsylvania locations employing 5,520 employees with a combined payroll of $273.7 million. The market value of these investments is $425.4 million, of which PSERS’ share is $93.9 million.

A key objective of PSERS’ venture capital program is to attract both national and regional funds into the Pennsylvania small business community. Venture capital investments serve to accelerate economic growth in both the business sector and the community due to an increase in employment and revenues within the Commonwealth. Following are a sample of Pennsylvania companies invested in by PSERS through the Venture Capital program:

• E-Duction, Inc., Blue Bell, PA - E-Duction was launched to capitalize on a growing trend that has emerged in payment technology - payroll deduction. In 2002, E-Duction introduced the first payroll deduction card that gives employees interest-free

purchasing power, 365 days per year. Employees purchase goods and services, at no interest, everywhere credit cards are accepted. Payments are deducted over a series of paychecks. E-Duction earns income from annual card member fees, interchange fees from every transaction, and preferred merchant promotional fees. Novitas Capital made this investment.

• Garnet BioTherapeutics, Inc. (formerly Neuronyx, Inc.), Malvern, PA - Garnet is a clinical state biotechnology company focused on applications with stem cells derived from adult bone marrow. Garnet uses genetically modified cells for specific applications in the development of neuroprotective agents for use in the treatment of major diseases. Garnet has developed a proprietary process for isolating and expanding adult bone marrow stem cells to provide extremely large, homogeneous populations with desirable therapeutic characteristics. Novitas Capital made this investment.

• PetFood Direct, Montgomeryville, PA - PetFood Direct is one of the largest online retailers of pet food and related products. With over 11,000 products and 400 brands, the Company meets the needs of pet owners by offering selection, discount prices and convenient delivery. The Company also provides value-added services for its customers, including an auto-ship program and information on pet healthcare and nutrition. LLR Equity Partners made this investment.

• Amkor Technology, Inc., West Chester, PA - Amkor is one of the world’s largest subcontractors of semiconductor packaging and test services. The semiconductors that Amkor packages and tests ultimately become components in electronic systems used in communications, computing, consumer, industrial and automotive applications. Amkor maintains production facilities in China, Korea, Japan, the Philippines and the US, and has long-standing relations with a broad spectrum of major semiconductor manufacturers including IBM, Intel Corp, Samsung and Texas Instruments. SCP Private Equity Partners made this investment.

Private EquityPSERS Private Equity program has committed $16.1 billion to 111 partnerships since the inception of the program. PSERS’ is the lead investor in many of the private equity funds in which it invests. As a lead investor, PSERS provides Pennsylvania with capital from numerous out-of-state investors. As of December 31, 2011, PSERS’ Private Equity partnerships invested in 1,018 Pennsylvania locations employing 30,983 employees with a combined payroll of $1,004.9 million. The market value of these investments is $22.4 billion, of which PSERS’ share


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is $923.6 million. From the inception of this program to December 31, 2011, 6 of the 110 partnerships were headquartered in Pennsylvania.

The following companies are a sample of Pennsylvania investments funded through PSERS’ private equity partnerships:

• AirClic, Newtown, PA – AirClic is a global provider of mobile software products that improve the performance of an organization’s supply chain, logistics and field services operations. The company has more than 500 global customers across multiple vertical markets. Using AirClic-enabled wireless devices, managers and workers can easily and economically capture, exchange, and access critical data that represent people, assets and activity. AirClic is driving new levels of accountability and improved customer service for many of the world’s leading companies. Edgewater Private Equity Fund III made this investment.

• CODi, Inc., Harrisburg, PA – CODi, Inc. is a provider of lightweight, high-quality laptop computer cases and information technology accessories to Fortune 500 companies. CODi’s accumulated knowledge dealing with the “corporate road warrior” allows the company to uniquely service corporate and consumer needs with precision. CODi uses a direct sales force to its competitive advantage, allowing a one-stop solution for customers in a market where distributors and value-added resellers are the norm. This one-stop approach allows high profitability as it captures up to three levels of contributions margins. The investment was brought about through Milestone Partners II.

• Gorell Enterprises, Indiana, PA - Gorell Enterprises is a manufacturer of specially engineered, custom-manufactured vinyl windows for replacement and new-construction applications, patio doors, aluminum storm windows and doors, sunrooms, and conservatories. Gorell is well known in the industry for placing strong emphasis on designing and manufacturing strong, durable high-quality products. Gorell was the national winner of the 2006 ENERGY STAR® “Sustained Excellence” Award, given for their new window models to make homes more energy efficient as well as secure. PNC Equity Partners made this investment.

• ICG Commerce, Inc., King of Prussia, PA - ICG Commerce is a leading procurement services provider exclusively focused on helping companies

achieve greater control and increased value from their procurement organization. The company offers sourcing and on-going operational buying services that enable companies to better manage procurement spending by providing consulting, automation and ongoing purchasing solutions. Graham Partners Investments made this investment.

• Interface Solutions, Inc., Lancaster, PA - Interface Solutions Inc. (ISI) is a leading manufacturer of fiber-based flooring felt and intermediate gasket materials and a fabricator of finished fiber, graphite and metal gaskets. Acquisitions, expansions, and capital investments in research facilities empower ISI to offer both OEM and aftermarket customers unmatched technical and design support and application testing. ISI has an extraordinary depth of experience and engineering knowledge, with roots to predecessor companies dating back over 90 years. ISI was created as an independent, private corporation in 1999, formed from the organization previously known as Armstrong Industrial Specialties Inc. (AISI). PNC Equity Partners L.P. made this investment.

Private DebtPSERS Private Debt program has committed $4.1 billion to 26 partnerships since the inception of the program. PSERS’ is the lead investor in many of the private debt funds in which PSERS invests. PSERS has committed $225 million to the two Pennsylvania-based Versa Capital Partners funds (formerly known as Chrysalis Capital Partners) managed by Versa Capital Management, located in Wayne, Pennsylvania. As of December 31, 2011, PSERS’ private debt partnerships invested in 201 Pennsylvania locations employing 10,964 employees with a combined payroll of $553.3 million. The market value of these investments is $4.6 billion, of which PSERS’ share is $259.1 million. From the inception of this program to December 31, 2011, 2 of the 25 private debt partnerships were headquartered in Pennsylvania.

The following companies are a sample of a Pennsylvania investments made through PSERS’ Private Debt Program:

• PQ Corporation, Berwyn, PA - PQ Corporation is a leading producer of silicate, zeolite, and other performance materials serving the detergent, pulp and paper, chemical, petroleum, catalyst, water treatment, construction, and beverage markets. It is a global enterprise, operating in 19 countries on five continents. Potters Industries, a wholly owned subsidiary, is a leading producer of engineered glass materials serving the highway safety, polymer additive, metal finishing, and conductive particle markets. OCM Opportunities Fund VII, LP made this investment.


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• David’s Bridal, Ardmore, PA - David’s Bridal is the leading bridal gown and bridal accessory retailer in the United States operating through the David’s Bridal and Priscilla’s of Boston divisions. The David’s Bridal division is a value-oriented provider while Priscilla’s of Boston is a luxury brand that caters to the more affluent segments of the market. This investment was made through New York Life Investment Management Mezzanine Partners II.

• DynaVox, Pittsburgh, PA - DynaVox, a former division of Sunrise Medical spun-out in May 2004, is the market leader in the alternative and augmentative communication industry, developing and selling devices and software for individuals affected by speech disabilities resulting from traumatic, congenital or degenerative conditions. This investment was made through New York Life Investment Management Mezzanine Partners I.

• Simplexity (Adeptio INPC Holdings, LLC), Wayne, PA – Simplexity is the leading independent online seller of wireless services, representing all major wireless carriers and selling primarily through proprietary websites (principally its flagship site, www.wirefly.com) and partner websites (e.g. Radioshack.com, Staples.com, Overstock.com). This investment was made through Versa Capital Fund I.

• Keane & Sons Drilling Corp., Wayne, PA – Keane & Sons Drilling provides oilfield services in the Appalachian Basin, including top hole drilling and hydraulic fracturing services to major operators in the Marcellus Shale basin and across the U.S. This investment was made through Cerberus Institutional Partners, L.P. – Series Four.



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Pennsylvania-Based Publicly Traded Stocks(as of December 31, 2011)

Security Shares Outstanding Market Value

Air Products & Chemicals, Inc. 106,126 $ 9,040,874 Airgas, Inc. 19,236 1,501,947 Alcoa, Inc. 299,648 2,591,955 Allegheny Technologies, Inc. 29,945 1,431,371 Amerigas Partners 14,200 651,922 Amerisourcebergen Corp. 72,735 2,705,015 Black Box Corp. 29,550 828,582 Comcast Corp. Class A 767,163 18,189,435 Consolidated Energy, Inc. 217,518 7,982,911 Dentsply International, Inc. 39,854 1,394,491 Endo Pharmaceuticals Holdings, Inc. 31,800 1,098,054 EQT Corp. 126,425 6,926,826 Federated Investors, Inc. Class B 152,701 2,313,420 FMC Corp. 19,827 1,705,915 H.J. Heinz Company 90,160 4,872,246 Hershey Company 43,099 2,662,656 Interdigital, Inc. 98,900 4,309,073 Kenexa Corp. 23,225 620,108 Mylan Labs, Inc. 120,082 2,576,960 PNC Financial Services Group, Inc. 163,144 9,408,514 PPG Industries, Inc. 76,961 6,425,474 PPL Corp. 162,817 4,790,076 Quaker Chemical Corp. 3,300 128,337 Sunoco, Inc. 36,092 1,480,494 Triumph Group, Inc. 11,060 646,457 II-VI, Inc. 34,200 627,912 United States Steel Corp. 40,542 1,072,741 Urban Outfitters, Inc. 31,261 861,553

Total $ 98,845,319


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Pennsylvania-Based Bonds(as of December 31, 2011)

SecurityInterest Rate

(%)Maturity

Date Par Value Market ValueAirgas, Inc. 7.125 10/01/2018 1,920,000 $ 2,055,418 Alcoa, Inc. 6.150 08/15/2020 425,000 441,567 Allegheny Energy Supply Co., LLC 5.750 10/15/2019 390,000 417,105 Allegheny Ludlum Corp. 6.950 12/15/2025 300,000 339,675 Allegheny Technologies, Inc. 9.375 06/01/2019 885,000 1,130,216 Allegheny Technologies, Inc. 5.950 01/15/2021 450,000 478,301 Allentown PA Taxable 0.000 10/01/2024 2,605,000 1,160,371 Allentown PA Taxable 0.000 10/01/2025 3,660,000 1,507,810 Amerigas Partners 6.250 08/20/2019 1,245,000 1,238,775 Comcast Corp. 6.500 01/15/2015 40,000 45,346 Comcast Corp. 5.875 02/15/2018 200,000 231,254 Comcast Corp. 5.700 05/15/2018 1,350,000 1,553,526 Comcast Corp. 5.650 06/15/2035 40,000 44,189 Comcast Corp. 6.450 03/15/2037 180,000 218,203 Comcast Corp. 6.950 08/15/2037 30,000 38,169 Comcast Corp. 6.400 03/01/2040 432,000 537,002 Consolidated Energy, Inc. 8.000 04/01/2017 2,170,000 2,376,150 Duquesne Light Company 6.700 04/15/2012 4,190,000 4,253,018 Endo Pharmaceuticals Holdings, Inc. 7.000 07/15/2019 530,000 564,450 Endo Pharmaceuticals Holdings, Inc. 7.250 01/15/2022 250,000 265,938 H.J. Heinz Company 6.000 03/15/2012 12,150,000 12,263,481 Hershey Company 6.950 08/15/2012 500,000 517,105 Koppers, Inc. 7.875 12/01/2019 1,245,000 1,319,700 Mylan, Inc. 7.625 07/15/2017 1,745,000 1,904,231 Mylan, Inc. 7.875 07/15/2020 700,000 772,625 New Enterprise Stone & Lime Company 11.000 09/01/2018 2,180,000 1,787,600 Penn Virginia Corp. 7.250 04/15/2019 830,000 771,900 PHEAA 0.448 07/25/2016 396,453 396,148 PHEAA 1.018 04/25/2019 3,273,693 3,275,166 PNC Funding Corp. 2.300 06/22/2012 3,500,000 3,534,895 PNC Funding Corp. 5.125 02/08/2020 1,950,000 2,203,442 PNC Mortgage Acceptance 6.800 03/12/2034 1,800,000 1,803,418 Sungard Data Systems, Inc. 4.875 01/15/2014 240,000 240,300 Sungard Data Systems, Inc. 10.625 05/15/2015 1,080,000 1,150,200 Verizon Pennsylvania, Inc. 8.350 12/15/2030 400,000 499,528 West Penn Power Company 5.950 12/15/2017 1,885,000 2,226,524 Wyoming PA Area School District 5.280 09/01/2014 1,280,000 1,323,840

Total $ 54,886,586


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Real Estate Separate Account Pennsylvania Properties(as of December 31, 2011)

Real Estate Separate Account Pennsylvania Properties

Property Location Description Manager

5 North Fifth Street Harrisburg 5 story office building Grosvenor(PSERS headquarters)

Total market value (unaudited) of Pennsylvania-based properties was $8.4 million as of December 31, 2011.



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Partnership LocationPSERS Maximum

Capital CommitmentAdams Capital Management, L.P. Sewickley $ 12.5 APA/Fostin Venture Fund I (closed) King of Prussia 20.0CEO Venture Fund I (closed) Pittsburgh 1.0CEO Venture Fund II (closed) Pittsburgh 15.0Co-Investment 2000 Fund, L.P. Wayne 135.0Co-Investment Fund II, L.P. Wayne 135.0Commonwealth Venture Partners I (closed) Philadelphia 20.0Commonwealth Venture Partners II (closed) Philadelphia 10.0Cross Atlantic Technology Fund, L.P. Radnor 30.1Cross Atlantic Technology Fund II, L.P. Radnor 21.1Graham Partners Investments, L.P. Newtown Square 56.7Keystone Minority Capital Fund (closed) Philadelphia 0.1Keystone Venture Fund IV (closed) Philadelphia 7.8LLR Equity Partners, L.P. Wayne 62.5LLR Equity Partners II, L.P. Wayne 75.0LLR Equity Partners III, L.P. Wayne 187.5Loyalhanna Venture Fund (closed) Pittsburgh 15.0Milestone Partners II, L.P. Rosemont 29.9Milestone Partners III, L.P. Rosemont 60.0Milestone Partners IV, L.P. Rosemont 24.3NEPA Venture Fund I (closed) Bethlehem 1.0NEPA Venture Fund II Bethlehem 5.0Novitas Capital I, L.P. Wayne 30.0Novitas Capital II, L.P. Wayne 75.0P/A Fund King of Prussia 30.0PNC Equity Partners, L.P. Pittsburgh 43.2PNC Equity Partners II, L.P. Pittsburgh 68.1Quaker BioVentures, L.P. Wayne 69.4Quaker BioVentures II, L.P. Wayne 100.0SCP Private Equity Partners I, L.P. Wayne 62.5SCP Private Equity Partners II, L.P. Wayne 125.0TDH III, L.P. Rosemont 7.4Technology Leaders, L.P. (closed) Wayne 10.0TL Ventures III, L.P. Wayne 50.0Versa Capital Partners, L.P. (f/k/a Chrysalis) Wayne 75.0Versa Capital Partners III, L.P. Wayne 150.0Total $ 1,820.1

Pennsylvania-Based Private Equity/Venture Capital/Private DebtGeneral Partners

(Dollar Amounts in Millions)(Since the inception of the program as of December 31, 2011)

Section 5 - Other PSERS Programs


Health Options Program

Pursuant to Section 8701 et. seq. of the Public School Retirees’ Health Insurance Act, 24 Pa. C.S. § 8701 et.

seq. PSERS sponsors a group health insurance program called the Health Options Program (HOP) for individuals who are annuitants or survivor annuitants or the spouse or dependents of an annuitant or survivor annuitant. The HOP is funded by and for eligible participants. The following is a summary of HOP initiatives during the period July 1, 2010 through June 30, 2011.

» The Retirement Board issued an Invitation For Application (IFA) to allow qualified insurance carriers to apply to PSERS to offer a fully insured Medicare Advantage group insurance plan and accompanying Pre-65 group insurance plan to PSERS retirees who participate in the Health Options Program (HOP). The effective date of the insurance is January 1, 2012. As a result of the IFA, PSERS is expecting the following carriers to participate in HOP:

Aetna

Capital Blue Cross/Keystone Health Plan Central

Geisinger Health Plan

Highmark

Independence Blue Cross (IBC)/ Keystone Health Plan East

UPMC

» The Retirement Board submitted an application with Health and Human Services (HHS) for the Early Retiree Reinsurance Program (ERRP). ERRP was established by section 1102 of the Patient Protection and Affordable Care Act (the Affordable

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Care Act), P.L. 111-148, enacted on March 23, 2010. The Congress appropriated funding of $5 billion for the temporary program. The program provides reimbursement to participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses and dependents. HHS will reimburse plans for certain claims between $15,000 and $90,000 (with those amounts being indexed for plan years starting on or after October 1, 2011). The purpose of the reimbursement is to make health benefits more affordable for plan participants and sponsors so that health benefits are accessible to more Americans than they would otherwise be without this program.

» The Retirement Board issued a Request for Proposal (RFP) for the Medicare Prescription Drug Program Support Services and Pharmacy Benefit Management Services effective January 1, 2012. The Retirement Board saved members enrolled in the Basic and Enhanced Medicare Rx Options $10 million by rejecting the results of the Request for Proposal for a Pharmacy Benefit Manager. The incumbent vendor agreed to a one year extension of the current contract until January 1, 2013.

» The Retirement Board continues to expand the capabilities of the HOPbenefits.com website. Currently the website gives HOP Medical Plan participants access to personal health information and provides them with the ability to inquire and receive updates on the status of their claims. The website is scheduled to provide all HOP participants access to their 2012 plan options for the open enrollment period.


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Health Options Program(continued)

Southeastern Region: Bucks, Chester, Delaware, Montgomery, and Philadelphia Counties 2011 2012 Increase/

(Decrease)Medicare Supplement Plan HOP Medical Plan $ 199 $ 199 0% w/ Basic Rx $ 226 $ 226 0% w/ Enhanced Rx $ 274 $ 280 2%Medicare Advantage Plans (compared with 2010 legacy plan) Aetna Medicare 15 Special PPO $ 306 $ 315 3% Highmark FreedomBlue PPO $ 541 $ 556 Independence Blue Cross / Keystone East HMO $ 351 $ 368 5%Legacy Medicare Advantage Plans (no new participants) Aetna Medicare 10 Special Plan HMO $ 397 $ 389 (2)% IBC’s Personal Choice 65 PPO $ 598 $ 636 6%

For Individuals Eligible for Medicare: For Individuals Not Eligible for Medicare Enhanced Medicare Rx Option (Medicare Part D) Basic Medicare Rx Option (Medicare Part D) HOP Pre-65 Medical Plan w/ Rx coverage HOP Medical Plan (Medicare supplement) HOP Pre-65 Medical PlanMedicare Advantage Plans Companion Pre-65 Managed Care Plans Aetna Medicare PPO Aetna PPO Plan Capital Blue Cross SeniorBlue PPO Capital Blue Cross PPO Geisinger Gold Preferred PPO Geisinger Choice PPO Highmark FreedomBlue PPO Highmark PPO Blue Independence Blue Cross-Keystone 65 HMO Independence Blue Cross-Keystone HMO UPMC for Life HMO UPMC Health Plan

HOP Premiums

Paid By Individuals ELIGIBLE for MedicareThe premiums paid by participants eligible for Medicare generally vary by geographical area. The exceptions are the premiums for the HOP Medicare Rx Options. The following is a summary of the 2011 and 2012 premium costs in Pennsylvania for single coverage:

Plans Available Through HOPHOP offers participants a choice among a supplement to Medicare, various Medicare prescription drug plans, and Medicare Advantage plans. Participants under age 65 and not eligible for Medicare may elect to enroll in a high deductible health insurance plan without prescription drug coverage or a managed care plan. These options were available to new enrollees or HOP participants electing to change coverage during the 2012 option selection period conducted in the fall of 2011. The following is a list of HOP plans as of January 1, 2012:


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Southwestern Region: Allegheny, Fayette, Greene, Indiana, Washington, and Westmoreland Counties 2011 2012 Increase

Medicare Supplement Plan HOP Medical Plan $ 195 $ 195 0%

w/ Basic Rx $ 222 $ 222 0% w/ Enhanced Rx $ 270 $ 276 2%Medicare Advantage Plans (compared with 2010 legacy plan) Aetna Medicare 15 Special PPO N/A $ 306 N/A Highmark FreedomBlue PPO $ 246 $ 261 6% UPMC for Life HMO $ 211 $ 211 0%Legacy Medicare Advantage Plans (no new participants) Aetna Medicare 15 Special Plan HMO $ 308 $ 384 25% Highmark SecurityBlue HMO $ 237 $ 252 6%

North & Central Region: All other counties in Pennsylvania 2011 2012 Increase/(Decrease)

Medicare Supplement Plan

HOP Medical Plan $ 164 $ 164 0% w/ Basic Rx $ 191 $ 191 0% w/ Enhanced Rx $ 239 $ 245 2%Medicare Advantage Plans (compared with 2010 legacy plan) Aetna Medicare 15 Special PPO N/A $ 212 N/A Capital Blue Cross SeniorBlue PPO $ 210 $ 210 0% Geisinger Gold Preferred PPO $ 181 $ 191 6% Highmark FreedomBlue PPO $ 226 $ 241 7% UPMC for Life HMO $ 211 $ 211 0%Legacy Medicare Advantage Plans (no new participants) Aetna Medicare 10 Special Plan HMO $ 223 $ 232 4% Capital Blue Cross / Keystone Central SeniorBlue HMO $ 209 $ 252 6% Highmark SecurityBlue HMO $ 237 $ 209 (12)%

Medicare Prescription Drug Plans All Regions 2011 2012 Increase

Basic Medicare Rx Only $ 27 $ 27 0% Enhanced Medicare Rx Only $ 75 $ 81 8%


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HOP Premiums Paid By Individuals NOT ELIGIBLE for MedicareThe premiums paid by participants not eligible for Medicare generally do not vary by geographical area. The exceptions are the regional managed care plans. The following is a summary of the 2011 and 2012 premium costs in Pennsylvania for single coverage:

All Regions 2011 2012 Increase

HOP Pre-65 Medical Plan (for comparison) HOP Pre-65 Medical Plan (Single Coverage) $ 621 $ 650 5% Pre-65 Medical Plan w/ Prescription Drugs $ 748 $ 750 0.3%

Southeastern Region: Bucks, Chester, Delaware, Montgomery, and Philadelphia Counties 2011 2012 Increase

Active Managed Care Plan Aetna PPO $ 773 $ 878 14% Highmark PPOBlue $ 1,014 $ 1,026 1%

Keystone East HMO $ 1,051 $ 1,051 0%

Legacy Managed Care Plans (no new participants)

Aetna Citizen HMO Plan $ 963 $ 1,201 25%

IBC’s Personal Choice PPO $ 1,248 $ 1,248 0%

Southwestern Region: Allegheny, Fayette, Greene, Indiana, Washington, and Westmoreland Counties 2011 2012 Increase/

(Decrease)

Active Managed Care Plan Aetna PPO (not available in all counties) N/A $ 878 N/A Highmark PPOBlue $ 1,014 $ 1,026 1% UPMC HMO $ 1,341 $ 1,967 47%

Legacy Managed Care Plans (no new participants)

Aetna HMO $ 963 $ 1,201 25%

Highmark HMO $ 1,441 $ 1,285 (11)%


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North & Central Region: All other counties in Pennsylvania 2011 2012 Increase/

(Decrease)Active Managed Care Plan

Aetna PPO (not available in all counties) N/A $ 878 N/A Geisinger $ 651 $ 957 47% Highmark PPOBlue $ 1,014 $ 716 (30)% Keystone Central PPO $ 934 $ 1,026 10% UPMC EPO $ 1,341 $ 1,967 47%Legacy Managed Care Plans (no new participants) Aetna Patriot Plan HMO $ 963 $ 1,201 25% Highmark HMO $ 1,441 $ 1,285 (11)% Keystone Central HMO $ 872 $ 968 11%

HOP Premiums Compared to the PSERS Premium Assistance BenefitThe following charts illustrate the HOP premiums paid by PSERS retirees for single coverage compared with the PSERS Premium Assistance benefit. The premiums for 2-person and family coverage would be at least twice the cost of single coverage. Premium Assistance is an offset for the PSERS retiree’s premium only.

$0$100$200$300$400$500$600$700$800$900

$1,000$1,100

North & CentralPA

Southwest PA Southeast PA Out of State(Average)

Companion Pre-65 Program

Comparison of 2012 HOP Premium Rates and Premium Assistance Benefit

HOP Medical w/ Enhanced Rx Option HOP Medical w/ Basic Rx Option

HOP Medical Plan Managed Care Plans (Average)

Premium Assistance

Sing

le C

over

age

per M

onth


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Central Region

SouthwestRegion

Southeast Region

Out of State (Average)

Companion Pre-65

ProgramHOP Medical w/ Enhanced Rx Option $ 245 $ 276 $ 280 $ 267 N/AHOP Medical w/ Basic Rx Option $ 191 $ 222 $ 226 $ 213 $ 750HOP Medical Plan $ 164 $ 195 $ 199 $ 186 $ 650

Managed Care Plans (Average) $ 213 $ 259 $ 413 $ 252 $ 1,062

Premium Assistance $ 100 $ 100 $ 100 $ 100 $ 100

The current Premium Assistance benefit will cover, on average, 42% of the fee-for-service premium and 44% of the managed care premium for retirees eligible for Medicare. The Premium Assistance benefit covers, on average, 12% of the premium for retirees not eligible for Medicare.



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HOP EnrollmentAs of January 1, 2012 there are 74,624 participants (61,832 retirees plus their dependents) in the HOP. The majority of the HOP participants were enrolled in the HOP Medical Plan with Enhanced Medicare Rx Option. The total numbers of retirees by Option are:

Individuals Eligible for Medicare Retirees ParticipantsHOP Medical w/ Enhanced Medicare Rx Option 24,717 29,003HOP Medical w/Basic Medicare Rx Option 16,821 20,080HOP Medical Plan (no Rx) 3,833 4,286HOP Enhanced Rx Only 70 86HOP Basic Rx Only 222 291Aetna PPO/Legacy HMO 792 982Geisinger PPO 110 144Highmark PPO/ Legacy HMO 12,361 16,167Capital BC PPO/Keystone Central Legacy HMO 772 1,017Keystone East HMO/IBC Legacy PPO 1,383 1,708UPMC HMO 216 293Total Medicare Eligible 61,297 74,057

Individuals Not Eligible for MedicareHOP Pre-65 Medical Plan 116 123HOP Pre-65 Medical Plan w/Rx Coverage 196 200Aetna PPO/Legacy HMO 27 32Geisinger PPO 11 13Highmark PPO 87 90Capital BC PPO/Keystone Central Legacy HMO 24 25Keystone East HMO/IBC Legacy PPO 70 80UPMC HMO 4 4Total Not Eligible for Medicare 535 567Total in HOP 61,832 74,624



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FundingA majority of the premium income is deducted from the retiree’s monthly retirement benefit and transferred to the plans (claims administrator for the self-funded Options). Approximately 5,000 retirees submit monthly premium payments to the HOP Administration Unit, as their monthly retirement benefits, if any, are insufficient to cover the premium cost. In addition, individuals enrolled in a Medicare Rx Option without HOP Medical Plan coverage must submit monthly premium payments.

The enrollment in the PSERS Health Options Program continues to increase. As illustrated by the following graph, the number of members has increased 21% over the past 5 years.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2007 2008 2009 2010 2011

Retir

ees E

nrol

led

Health Options Program Enrollment History

HOP Medical Plan (no Rx)

HOP Medical w/BasicMedicare Rx Option

HOP Medical w/ EnhancedMedicare Rx Option

HOP Managed Care Plans


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Income 2011 Participant Contributions $ 218.0 CMS - Medicare Prescription Drug Payments 34.0 HHS – Early Retiree Reinsurance Program 0.5 Interest Income 0.5Total $ 253.0

PSERS retirees enrolled in HOP, who meet the eligibility requirements for Premium Assistance, receive $100 per month as a partial reimbursement for the out-of-pocket premium expense. Approximately 50,800 of the 78,500 HOP participants receive Premium Assistance. This accounts for about $61 million of the $94 million annual benefit expense of the Premium Assistance Program. The following Premium Assistance Program section provides additional information.

Contributions and interest income pay for the benefits provided to HOP participants plus administrative expenses. The following is a breakdown of the projected benefit expenses (Dollar amounts in Millions):

Benefit Expenses 2011 Self-funded Hospital, Medical & Major Medical Benefits $ 99.0 Self-funded Prescription Drug Benefits 78.0 Managed Care Contributions 61.0Total $ 238.0

HOP income is projected to be $253 million during the 2012 Plan Year. A majority of this income comes from premium payments from participants. Other sources of funding are Medicare prescription drug payments (for participants enrolled in a Medicare prescription drug plan) from the Center for Medicare and Medicaid Services (CMS), anticipated payment from the Early Retirement Reinsurance Program (ERRP) from Health and Human Services (HHS), and interest income. The following is a breakdown of these sources of income: (Dollar amounts in Millions):

In addition to the benefit expenses identified above, the HOP will pay $6 million in enrollment and administrative expenses including reimbursing PSERS for its expenses.

As of June 30, 2011, HOP had net assets of $122 million held in trust to pay the expenses of HOP for the exclusive benefit of participants.


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Premium Assistance Program

In accordance with Section 8509 of the Public School Employees’ Retirement Code 24 Pa. C.S. § 8509,

PSERS provides up to $100.00 per month in Premium Assistance to eligible retirees to help cover the cost of their health insurance. The eligibility requirements for premium assistance are as follows:

• 24.5 years of credited service, or

• 15 years of credited service if termination of employment and retirement occurred after age 62, or

• Receiving a Disability annuity from PSERS; and

• Have an out-of-pocket premium expense from their former school employer’s health plan or the PSERS sponsored Health Options Program (HOP).

EnrollmentAs of June 30, 2011, PSERS had 183,665 retirees (excluding survivor annuitants and beneficiaries) receiving a monthly benefit. Of these retirees 120,458 meet the service, service and age at termination of school service, or retirement type (disability) eligibility requirements for the premium assistance program. Of the retirees meeting these requirements, 41,964 are not receiving premium assistance payments because they do not have an out-of-pocket premium expense from an approved plan. Of the 78,494 retirees receiving premium assistance benefits, 50,808 are enrolled in HOP and 27,686 are participating in their former school employer’s health plan and have an out-of-pocket premium expense.

A breakdown of retirees by their premium assistance status is as follows:

Eligible for Premium

Assistance w/o Approved Expense

23%

Receiving Premium

Assistance In School Plan

15%Receiving Premium

Assistance In HOP28%

In HOP w/o Premium

Assistance5%

Not In HOP or Eligible for Premium

Assistance 29%

Retiree Population By Premium Assistance Status

Retirees Meeting the

Service or Retirement

Type Eligibility Requirements

66%


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Premium Assistance Program(continued)

FundingThe Premium Assistance Program is funded by employer contributions. The PSERS Actuary determined that the contribution needed during the 2012/13 fiscal year is 0.86% of payroll. For the year ended June 30, 2011, employer contributions equaled $89.2 million and net investment income equaled $0.7 million. During this period, PSERS paid Premium Assistance benefits equaling $93.5 million and incurred administrative expenses of $2 million.

As of June 30, 2011, the Premium Assistance Program had net assets of $111.2 million.

June 30, 2011 Number Percentage Eligible for Premium Assistance w/o Approved Expense 41,964 22.8%Receiving Premium Assistance In School Plan 27,686 15.1%Receiving Premium Assistance In HOP 50,808 27.7%In HOP w/o Premium Assistance 8,747 4.8%Not In HOP or Eligible for Premium Assistance 54,460 29.6%Total Retiree Population 183,665 100.0%

1 Meeting the service, service and age at termination of school employment or retirement type requirements.2 As of June 30, 2011 Actuarial Valuation (Excludes Survivor Annuitants and Beneficiaries)

february 23, 2012 - psers€¦ · mendations for the 2012/13 fiscal year. in addition, psers...

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